Saving for retirement is often thought of as a luxury that only the middle class can afford.
In this webinar a team of experts assembled by Moneyweb discuss how much of your gross salary you should be saving to cover your requirement needs.
It’s a complicated subject, with multiple variables, as Warren Ingram from Galileo Capital, Owen Nkomo from Inkunzi Investments and Craig Gradidge from Gradidge Mahura Investments point out. They were hosted by Simon Brown, from Just One Lap.
Assuming you start saving at the age of 25, that you earn an annual increase of 6% (in other words inflation linked), that you earn an 11% return on your invested capital and that you save until retirement – then and only then is saving 15% of your gross salary sufficient. “If you save like this, under what is a very narrow set of assumptions, then 15% is enough,” says Gradidge.
At this point Ingram practically choked in his coffee. “There’s no chance. 15% is a get by number. For a modest life – less than what you have now – its okay. It’s definitely better than nothing. But if you want a quality retirement you should be aiming for 20%, if not closer to 30%,” he says.
“I wouldn’t sleep at night if I was saving 15% to live two thirds of my current life. People who are listening to this are aiming to live their best lives, 15% is not the goal,” he adds.
Of course, for a white collar professional, saving 15% is one thing, but for a store assistant, saving 15% might be a different challenge entirely, says Nkomo.
And then there are so many variables that can affect the savings outcome – inflation, salary profile, returns, tax, – making it essential to constantly revisit the savings plan. “An 11% nominal return is achievable, Nkomo says. This is less than the long run average equities return. But to achieve this investors need to put their money in the right investments.”
For instance, just because an investor is reaching retirement age is no reason to cash out of listed property and equities. “What I can tell you is that sitting with government bonds or cash at 65 is high risk,” says Ingram. “Don’t ever have less than 35% of your portfolio in shares – under any circumstances. A good number is 75% in equities and listed property unless you are 25 years old. If you have 80% in cash, you have bought yourself certainty that you are going to destroy your capital.”
The quantum of salary is less important than the duration of the saving period. Nkomo described the situation of a client who had worked for government for 35 years and was preparing for retirement. “We helped her pay off her debt and structured her investment so that she was guaranteed a comfortable retirement.” She had saved enough, on a modest salary, such that she was able to live very comfortably on R10 000/month.
“But this client is an outlier,” he adds
More often than not, the people who are saving more than 15% are playing catch up, says Gradidge. “They have drawn money out along the way and so disrupted compounding.”
Timing is not the only critical factor. Managing fees is important, possibly the next most important element after asset allocation. The team debated the merits of performance fees and annual fees, with Ingram arguing strongly that performance fees on top of annual fees are unjustified. “Hold your product providers to account and don’t be afraid to question the value you are getting.”
What is a reasonable fee? Roughly 0.25% for the retirement annuity; 0.5% for annual advice; and anything between 0.6% and 0.75 for asset management, totalling about 1.5%/year for fees – more if you want all active management and a little less if you have lots of passive products, the team said.
For more on tax free savings accounts, the role of preference shares in a portfolio, common mistakes, regulation 28 compliant investments – and the limitations of these – download the webcast from here.