How much you should be saving for retirement in South Africa

If you want to retire comfortably in South Africa, it is important to start early and save the correct amount at every age since the amount you need to put away can quickly spiral out of control if you don’t.

Unfortunately, most South Africans cannot afford to retire comfortably or on time.

Data collected on over 300,000 Sanlam retirement fund members shows that while the official retirement age remains 65, most people can only afford to retire at 80.

Proper retirement planning is crucial to ensure that you have enough saved to retire comfortably and at your desired time.

However, this is complicated by the fact that many people do not know how much they should be saving and do not account for important costs when calculating it.

For example, Allan Gray communications manager Twanji Kalula warned that many people only calculate how much they need to save for retirement once they start working and fail to readjust for the effect of lifestyle inflation throughout the years.

As a result, they do not save as much as they should and can no longer afford their lifestyle once they reach retirement age.

Nedbank explained that planning is also difficult because it is impossible to know what the cost of living will be once one retires in several decades.

When planning for retirement, remember the cost of living will rise over the decades.

“That’s when projections based on an analysis of prior financial patterns and current trends in inflation can be useful,” Nedbank said.

“Based on past behaviour and current evidence, financial experts can make some educated guesses about the future cost of living.”

“Your eventual needs will depend on your personal circumstances, including how old you are now, whether you’re married and have a family, when you plan to retire and whether you have already started investing in retirement savings.”

While financial projections aren’t a guarantee of what will happen in the future, they can be a handy planning tool when they are based on sound assumptions with solid data, Nedbank said.

“Statistically, you’ll probably work from your 20s into your 60s, maybe even into your 70s. And with life expectancy increasing, you could live on into your 90s or past 100,” Nedbank said.

“That gives you 40 to 50 years of working life to save enough money to see you through another 30 or 40 years or more. You could be dependent on your retirement savings for almost as long as you spent saving them.”

To illustrate how much you should be saving for retirement, Nedbank used the example of someone who starts saving at 25.

They used the assumption that they earn a salary of R20,000 a month, with expenses of R15,000.

At this stage of your life, you should be saving between 10% and 15% of your salary, although some say you should be saving as much as 17%, the bank said.

“In our example, we’re using 17.5% to get a round amount of R3,500 a month,” the bank said.

They assumed that the salary and contributions would grow at an average of 5% a year.

“To simplify the test case further, we’re assuming that inflation over the next 40 years averages out at 4% a year and that you earn an average return on your investment of 10% a year.”

“By the time you’re 35, your salary will have grown to around R32,500, and your monthly expenses will be about R22,000, while you should be saving just more than R5,000 a month.”

“If you’ve been saving diligently, your retirement savings would have grown to about R850,000 in those 10 years.”

Fast-forward another 10 years, and your savings – if left untouched – will be close to R4 million. During this time, your monthly expenses will be approximately R33,000, while your salary will reach around R53,000.

By 2052, when you turn 55 years old, you will have a substantial retirement fund worth R12.5 million. At this point, your monthly salary is expected to be about R86,000, with your monthly expenses now nearly equal to what your salary was a decade earlier.

As you approach the age of 65, you’ll be in the final stretch before retirement, though advances in medical technology may allow you to remain productive for another 10 years or more.

In either scenario, you will have saved R34 million for your retirement, which should provide ample financial support throughout your retirement years.

“This may seem like a really large amount, but don’t be fooled,” Nedbank warned. “When monthly expenses are an eye-watering R235,000 by the time you turn 95, you’ll be spending almost R1 million every 4 months – or nearly R3 million a year.”

“Put another way, your total expenses in the 30 years between retirement at 65 and you reaching the age of 95 will be almost R50 million.”

Considering that your expenses in your 40 working years before retirement would have been only R17 million, this is staggering.

However, if you wait longer to start saving, the amount you put away every month will have to increase in order for you to have saved enough by the time you retire.

Assuming that you need a 75% replacement ratio, Discovery calculated that you will need to save 14% of your income if you start at age 20.

By 30, this amount increased to 22% and by 40, you will need to save more than a third of your income at 37%.

If you wait until 50 to save for retirement, though, you will need to put away 74% of your income every month to achieve your replacement ratio.

“So there really is very little time to waste if you want to maintain the same lifestyle in retirement that you are enjoying while still working,” Nedbank said.

“Reaching retirement should then be a celebration, not a nagging concern about your future well-being.”