This is how much money you need to retire comfortably

“How much do I need to retire comfortably?” This is a question Andre Tuck gets asked all the time.

As the consultant team lead at 10X Investments — an investment management firm specialising in living annuities, retirement annuities and preservation funds — clients seek to leverage Tuck’s decades of experience in the financial services industry to get a realistic idea around which to build their retirement plans.

After asking the question, clients are often taken aback by the answer. But, before getting to Tuck’s answer, you need to understand that the key to the whole equation is time.

Knowing how much you need to save for retirement is based on how old you are now. That number is the starting point, because it gives you an idea as to the time horizon you are working with as well as an indication of a relevant risk profile for your investments. 

Clearly, the earlier you start, the more you are able to benefit from the compounding growth of your investments. Assuming you’re invested in the right product with a reputable investment manager, you can think of it like this: 

Your monthly contributions + consistency + time = a better chance at a good return on your investment. 

Want to see what’s possible in the time between now and your retirement? 10X has made that easy. Use one of its handy calculators to do your sums:

• Retirement annuity calculator 
• Preservation fund calculator
• Living annuity calculator 

Finally, you need to keep in mind that the costs of your investments (that is, the fees you pay to your investment manager) can hugely affect your returns. A 1% difference in fees can mean the difference between a comfortable and a stressful retirement. If you are unsure of your costs, use 10X’s Effective annual cost calculator or get a free cost comparison.   

Three rules of thumb for adequate retirement savings

It’s worth remembering that none of these formulas is guaranteed to help you retire well. They’re based on what Tuck has seen over the years and are offered here only indicatively, as a sobering reminder to have realistic expectations for the income retirement investments can generate for you once you are no longer working.

1. Multiply your final annual salary by 15

If, for example, your take-home pay is R25,000 a month in your final year of working, that would mean an annual salary of R300,000. To maintain your lifestyle after retirement, you’ll need about 15 times your annual salary, so 15 x R300,000, which is a lump sum of roughly R4.5m.

However, if you’re hoping to do things you didn’t do during your working years, for example travel or new hobbies, you should rather multiply your final salary by 17, or even 20 or more.

2. Save R1m for every R5,000 you want to draw down as a pension every month

You can also get a rough idea of how much money you’ll need to have saved at retirement by assuming that you will need R1m invested in an annuity for every R5,000 per month you want to draw as income once you’re retired. (R5,000 being a conservative and more importantly sustainable estimate, that tries to ensure you do not eat into your investment capital.)

Thus, if you want to draw a monthly pension of R25,000 a month, you will need to have put away R5m by the time you retire.

3. Multiply your monthly needs by 300

One of the simplest calculations is to multiply what you think you’ll need per month (say R25,000) by 300 to determine the lump sum you will need to have saved (R7.5m in this example). This option gives a slightly higher figure than the other two options, which is a good thing.

Having tried one of those calculations, you’re probably saying that you should ramp up your savings. And you should — as a country, we don’t save enough. The majority of respondents (71%) to the survey used to compile the 10X Retirement Reality Report indicated that they had no retirement savings plan at all, or just a vague idea of one. And, according to the South African Reserve Bank, the average South African spends 75% of their pay cheque on servicing debt.

So, what can you do to help ensure a comfortable retirement?

Speak to a retirement specialist and get a plan together. Tuck and his team’s mission is to ensure that you make the right decisions for your retirement, and if you’re better off somewhere else, they’ll tell you. 

Other guidelines to help secure the retirement you deserve include:

• Pay your future self, first. Don’t wait until the end of the month to save or invest. As soon as your salary comes in, invest a portion for your retirement. That way, you can spend anything that’s left in good conscience. This is a small change that can have huge, life-altering consequences.
  
  
• Have the correct asset allocation within your investment portfolio. Being diversified in all asset classes throughout the retirement journey will ensure the protection of your capital.
  
  
• As mentioned before, don’t pay high fees. Do your homework on your investment management fees, as they compound against you the longer you are invested. Use 10X’s Effective annual cost calculator or get a free cost comparison if you’re unsure of your fees or feel your investments could be doing more for you. Do not fund someone else’s retirement — look after your own needs. 

The truth is, as a country we are very good at sacrificing the long term in service of keeping up with the Joneses. The money you are spending now on servicing your debt or incurring expenses you don’t need to could be put towards your retirement plan or constructively invested elsewhere to ensure you will be comfortable in your golden years. Get a retirement plan in motion today and stick to it diligently. It’s your future.

Got questions? You can speak directly to Tuck and his team about your retirement planning, at no cost to you. Simply get in touch — there are no call centres at 10X, just experts ready to help.

This article was sponsored by 10X Investments.

^{The content herein is provided as general information. It is not intended as, nor does it constitute, financial, tax, legal, investment or other advice. 10X Investments is an authorised FSP (number 28250). The 10X Living Annuity is underwritten by Guardrisk Life Ltd.}