Saving for retirement: how do I know if I’m on track?
Are you saving enough for retirement? What should you do if you’re not?
Saving for retirement is the largest financial challenge in life for most people. While many understand the importance of building up a retirement nest egg, and contribute a portion of their monthly salaries towards that goal, they do not always know if they will end up with enough money in retirement.
So how can you check if you are on track – and what should you do if you are not?
Donna Barnes, head of direct channel at Nedgroup Investments, has provided guidelines for investors so that saving for retirement feels less like a large monthly sacrifice and more like a manageable part of your savings, so you can enjoy life knowing you are on track for financial stability in your old age.
1. Understand the process
The first step towards an effective retirement plan is to understand it is a structured and long-term process. It requires investors to save enough (more than 15% of their salaries) for long enough (at least 35 years), with an appropriate investment strategy (determined by life-stage and inflation targeting) and at a low cost (bearing in mind risk levels, administration and types of investment). Investors must also stick to the plan by preserving their funds, staying informed and only making changes when necessary.
2. Understand how much you will need
It’s one thing knowing you need a plan. It’s another altogether knowing whether that plan will get you to the lump-sum figure you will need to live comfortably in retirement. In general, successful retirement savings will be enough to sustain 75% of your final salary adjusted for annual inflation for 20 years or more. That may seem like a mouthful, but it is relatively easy to calculate – especially with the help of a financial adviser – and it is a crucial figure to know.
3. Check in as your career progresses
Once you have worked out how much you need to save for retirement, it is not as simple as saving each month until you reach that goal. This is because many things will change over the course of your career that could affect your retirement savings – for example, salary adjustments and inflation rate changes. But there is a way to check if you are on track or whether you need to make changes.
Here's how to check your current retirement savings against your current salary.
Working years and rule of thumb (retirement savings target)
- 10 years: 2 times current salary
- 20 years: 5 times current salary
- 30 years: 10 times current salary
- At retirement (40 years): 16 times final salary
If you realise along the way that you are falling short of these targets, you still have time to adjust your savings plan and get back on track. Consult your financial planner to assess the shortfall and discuss the best way to address it. The options at your disposal will depend on your life stage, risk profile and years left until retirement, among other things.
4. Take advantage of tax savings
By using the tax benefits of retirement annuities (RAs) and tax-free investments, investors can noticeably enhance the amount they save for retirement – especially by reinvesting any tax rebates that they receive from their RAs.
A strategy that makes the most of tax efficiency is based on allocating a proportion of funds between a retirement saving vehicle and a unit trust or tax-free investment to create liquidity. Then, as one’s financial position progresses in terms of salary and age, the allocation will be adjusted to ensure the maximum possible annual tax rebate (as the tables below show).
The first table looks at the possible outcomes for every R10,000 lump-sum investment, while the second looks at monthly investments of R1,000 over the minimum investment horizon.
Estimated annual tax deductions based on a R10,000 annual lump-sum contribution for different MR*
“While the savings journey will be unique to every individual, keeping these four principles of saving top of mind provides a long-term, logical structure for sustained and achievable financial wellness,” says Barnes.
This article was paid for by Nedgroup Investments.