DIY investor? Crunch the numbers on retirement savings
Most major financial firms that provide retirement annuity and pension plans have tools to help you with the figures towards your goals
If you’re a DIY investor, or someone who isn’t partial to taking financial advice, you should at least test an online retirement calculator to check if your savings are on track. Most of the big insurers have these calculators, but some are more useful than others.
Online retirement calculators are designed to help you work out whether your current retirement savings — including what you save in an employer-sponsored fund and on your own in a retirement annuity or preservation fund — will last the number of years you expect to live in retirement, or to calculate how much money you need to save to get your desired monthly income in retirement.
But figuring out that desirable monthly income can be tricky if you haven’t grasped the concept of a replacement ratio. A replacement ratio is the pension your savings will provide when you retire expressed as a ratio of the salary you were receiving just before you retired. Because most people have fewer expenses in retirement, a replacement ratio of 70% is often considered enough. But everyone’s financial circumstances are different and if, for example, you are going to be paying a home loan in retirement or supporting dependants, you may need a higher replacement ratio.
It’s also tricky to guess what the average inflation rate might be while you’re saving for retirement, or the rate at which your retirement savings should grow. Remember, your investments should grow at an above-inflation rate in line with the investment risk you take, and the actual inflation rate is less important as it affects both your investments and the income you require in retirement in the same proportion.
If you are a long way from retirement, you should be invested in more growth assets and expect an average return of at least 5% a year after inflation. If you are more conservatively invested because you are closer to retirement or in retirement, your return is likely to be a lower inflation plus 2% or 3 %.
Another difficulty you may face is figuring out how much you are saving for retirement if your employer also contributes on your behalf to an employer-sponsored fund. If you have group life and disability cover, you will need to strip out this amount as well as any fund costs.
Many calculators also ask you to guess how long you will live in retirement, which is hard to do, but if you reach age 65, statistics show you have a one in two chance of living to 85 if you are a man and 89 if you are a woman. You also have a one in 10 chance of living to 100 as a man and 104 as a woman. Current advice is to plan for at least 30 years in retirement.
Some calculators will tell you how much you need to have saved by the time you reach retirement, while others will tell you how much more you need to save, and some will show you both. Others will show you at what age in retirement you will run out of money based on the amount of money you want as an income in retirement.
But retirement calculators provide you with little more than a rough guide, and all are based on assumptions made by you or built into the calculator. So while they have their place, they are no substitute for the calculations a financial adviser will make when taking a holistic look at your unique personal finances and needs.
Below are just a few examples of some of the retirement calculators available online:
Discovery: Discovery’s calculator is easy to use, until you have to make some investment assumptions. The first two sections require that you insert your current age, retirement age and your estimated life expectancy. Then you punch in your income before tax and the monthly income you want in retirement, in today’s terms. But then you need to assume the inflation rate, investment return before retirement and investment return in retirement.
Liberty: Liberty’s calculator aims to provide you with the two most important figures you need to know: the amount you need to have saved up by the time you retire; and how much you need to be saving every month to reach that goal.
However, some of the questions are poorly framed. The easy questions include how much you need in an income before tax in today’s terms, the number of years until you retire, and the number of years you need an income in retirement. But you will have to provide an expected inflation rate and an expected rate of return on investment. The last question is: “Monthly income expected at retirement, for example existing policies”.
Liberty actuary Henk Appelo agrees the question is impossible to answer. But if you enter zero into that field, the calculator still works, and churns out two figures, though they won’t take into account what you have already saved for retirement. Appelo says the calculator needs to be redesigned.
Prudential: Prudential’s calculator is by far the most user-friendly, with eight simple questions: your current age; your retirement age; number of years in retirement; salary (though it doesn’t specify whether this is pre-tax or not); how much you are currently saving towards retirement; how much you have saved for retirement; your expected replacement ratio; and your expected real (after-inflation) return.
Within seconds, you’re provided with a table of the questions and your answers which produces a summary and a graph. The summary shows you how much you will have saved by the time you reach retirement age, how much your income in retirement will be at your selected replacement ratio, and when you will run out of money in retirement.
What’s very useful is that you can change any of your answers, and the graph changes accordingly to show you that if, for example, you push out your retirement age to 65 and drop your replacement ratio to 60%, how much longer your money will last.
Sanlam: Using Sanlam’s calculator is a cinch. Just enter your gender, age and planned retirement age, followed by your pre-tax income, desired monthly income in today’s terms, how much you’re saving towards retirement every month, and the value of your current retirement savings.
The calculator tells you how much more you need to be saving a month to generate the monthly income you want in retirement. Sanlam’s is the only calculator that comes with a warning that the calculations are determined using projections based on assumptions about uncertain future outcomes and hence the need to review your retirement plan regularly.
10X: You answer two easy questions and 10X calculates your goal lump sum at retirement that will generate a pension at a replacement ratio of 60%. You can test what happens if you adjust this upwards or downwards. The calculator works out how much you need, and what pension that will provide. You can then check whether you’re on track to get there by answering two more questions: what percentage of your pre-tax salary can you save towards retirement each month, and what are your total current retirement savings. Then it shows you your shortfall, but doesn’t tell you how much more you should save monthly to address the shortfall.
10X is giving away R1m invested in a retirement annuity in a lucky draw that closes on November 1. To enter, you must provide 10X with your age, the age at which you plan to retire, your name, e-mail and cell number. You can receive one additional entry to the competition if you tell 10X how much retirement savings you currently have, and who you are currently invested with.