How much you need to retire early in South Africa

South Africans looking to retire at 55 need to have saved 30 times their annual salary. To retire at the normal retirement age of 65, they would need 18 times their annual salary.

Phoenix Financial Benefits managing director Ilze van der Berg recently explained that early retirement requires thorough planning and consideration.

She said South Africans need to consider several factors when planning for retirement – the age at which they wish to retire, their health, life expectancy, the power of compound interest and the possibility of foregoing career opportunities.

The earlier someone wishes to retire, the more they need to have saved by then. At 55, someone would need 30 times their salary to maintain their lifestyle in retirement.

This amount decreases the older someone is when they retire. At 60, you would need to have saved 23 times your annual salary. At 65, you would need 18 times your annual salary.

Van der Berg explained the opportunity cost of early retirement – many people earn their highest salaries right before they retire, so they forego some of their highest income by leaving the workforce earlier.

At this point, they will also earn the highest interest on their savings thanks to compound interest.

Van der Berg explained that thanks to compound interest, the value of your retirement fund savings at age 55 could more than double in the 10 years to age 65.

If people retire early, they tap into their retirement savings earlier, which means that they earn less interest on their savings. This could significantly impact their retirement nest egg.

Additionally, people nowadays live longer, which has several implications for retirement planning.

Better life expectancy means that people can work longer and thus have more time to save for their retirement. It also means that their retirement savings potentially need to last longer.

Health also plays an important role in retirement planning, which Van der Berg describes as a double-edged sword.

This is because an individual would need more money if they live long, but they will also need more money if they are in poor health.

“The earlier you retire, the more you need to have saved, as your retirement benefit must last for a longer period,” she explained.

Therefore, it is crucial to have a retirement plan from early on to scrutinise one’s financial position and identify the risks associated with an early retirement.

However, Sanlam Corporate recently reported that many South Africans do not save for their retirement at all.

Therefore, many South Africans have to retire much later than they might think because they do not have enough saved by the time they want to retire.

However, Van der Berg said there are ways to enhance your financial position in the years leading up to retirement, which she outlined below.

Enhancing retirement finances

Maximise savings

Van der Berg said you should try to increase their savings to the maximum they can afford.

She explained that you can push the limit of your savings by making additional voluntary contributions to your retirement funds or increasing the contributions to your existing retirement annuity plan or savings.

Limit daily expenses:

You can limit daily expenses and allocate the money they save to their retirement fund.

While limiting daily expenses decreases your standard of living at that time, it will make your retirement more affordable.

Pay debts

Van der Berg warned that debt has the potential to drain retirement savings. Therefore, it is better to pay off the debt sooner rather than later.

Investment portfolio risk

Van der Berg explained that it is important to consider the risk profile of an investment portfolio.

This is because you must strike a balance between the interest you earn on your retirement fund and the risk associated with that rate.

In addition, your retirement investment must grow at a rate higher than inflation to ensure your savings are enough to last you well into retirement.

Later retirement

Van der Berg said you can also consider retiring later on in life to get a greater benefit from compound interest and to be reliant on your retirement savings for a shorter period.