by | Aug 1, 2023

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When we start working after leaving school or completing our studies, the feeling of financial independence is great, not to mention that 1st paycheck! The list of items we want to buy is never ending. However, making provision for retirement savings doesn’t even feature in our budget calculation if there is one. As the years tick by and adequate contributions aren’t made towards a retirement plan, this increases the amount required to put aside monthly purely because the older we get, the shorter the period to save before retirement, and this reduces the time for compounding growth to take place.

So let’s take a look at some examples of how much a person would be required to put away monthly starting from their different ages at present, but to achieve a monthly income equivalent to R30,000 per month in today’s terms, adjusted for inflation, in order to accumulate a sufficient lump sum for the income to increase by 6% per annum in order to keep up with inflation, and to last to your age of 100. With medical advancements the average survival age is continuously increasing, and therefore we need to make provision that our monies outlive us in retirement, as opposed to us outliving our monies.

Present Age Retirement Age Years to Retirement Income required per month at Retirement
(R30k adjusted for inflation)
Monthly contribution required
(Increasing by 6% per annum)
20 65 45 R389,500 per month R2,220 per month
30 65 35 R217,500 per month R4,120 per month
40 65 25 R121,500 per month R8,150 per month
50 65 15 R67,800 per month R18,800 per month
60 65 5 R37,900 per month R76,400 per month

As you can see from the above, although a person who has a shorter time to retirement needs to cover a lower monthly income because of a shorter inflationary effect on the income required, the monthly contribution they need to make is substantially higher because they have a shorter time to build capital, and therefore the compounding period is shorter as mentioned above. It is also important to note that the capital remains invested during retirement in order to ensure compounding growth can take place over this period. Ultimately there is a direct correlation, the shorter the investment horizon, the higher the monthly contribution required is.

Besides the savings required to provide for retirement, it is important to ensure that at retirement, a couple of boxes are checked in order to retire comfortably. They are as follows:

  • Firstly, don’t assume the contribution made by your employer towards retirement is sufficient for you to retire comfortably. Ensure your Resolute Wealth Private Wealth Manager has calculated what is required in order to ensure sufficient provision is made for retirement.
  • If sufficient provision has been made for retirement, a person should have accumulated sufficient financial assets to be financially independent. Therefore, there should be no need for long-term assurance as any person you may support financially should benefit from your estate if you pass away as long as your Last Will & Testament is up to date, and as you are no longer earning an income from an employer, income protection or similar is no longer required.
  • Once a person is in retirement and is drawing an annuity or income from their investments, any contributions towards long-term savings and retirement planning would then come to an end.
  • Ideally when a person enters retirement, they should be completely debt free, and no future debt should be entered into unnecessarily. Any interest payable will detract from the retirement income a person will receive. Remember, a person’s primary residence must never be included in their financial assets to provide you with income in retirement because you will always need this roof over your head. If you decide to move into a smaller property or similar later on in life, any surplus funds after purchasing a new property can be included into the calculation at that time.
  • Once again, ideally when a person enters retirement, they should no longer have any dependents who are reliant on their income, except those who have been included in their retirement plans, such as a spouse. Any children should have hopefully flown the nest and should be financially independent in this regard.

When we consider the above reductions in monthly expenses, and the fact that when a person retires, their expenses should decrease due to a decrease in day-to-day travel & expenses, no additional work attire is required, and similar. A person’s income needs in retirement should equate to an estimated 75% of their income earned while receiving a salary due to the reduction in expenses. This however is very much dependent on a person’s plans for retirement. If your dream for retirement is to travel the world, then provision needs to be made in this regard to ensure you can afford it.

In summary, it is extremely important that a person does start to make provision for their retirement from the start of their working career. But equally important is to ensure that you do sit with your Resolute Wealth Private Wealth Manager as mentioned above, and map out your needs in retirement, and how you are able to achieve your goals. The sooner this can be done, the sooner it can be monitored and on a regular basis you can see if you are on track, falling behind, or are hopefully ahead of where you need to be.