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How much is enough

The vexed issue of saving for retirement.

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.

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I’m a huge advocate of savings but I don’t think scare tactics like saying if you don’t save 30% of your gross income you are doomed to cat food and you should suffer from anxiety. That type of language scares the living $%^& out of most people and has the opposite effect on them, they are so intimidated by the number they don’t ever start saving. For most people it is impossible to save 30% of their gross on top of other commitments. A quick glance at the numbers illustrates this assuming a house hold of 2 working adults and 2 kids:

1,000,000 salary (assuming 2 people earning 500k)

240,000 approx tax on gross salary of both 500k
300,000 proposed retirement saving as per above article
100,000 proposed child edu savings/spend assuming 2 kids
12,000 cell bill – 500 per adult per month
60,000 medical spend – medical aid and out of pocket for 4 people
35,000 insurance – household, car, life disability etc for 2 adults
180,000 home loan/rent/rates taxes/property maintenance etc.

And after this you have the grand total of less than 100,000 for food and everything else in life. And I think I’ve been pretty conservative with some of the numbers above. It doesn’t even include cost of a vehicle or 2 (loan repayments, petrol, maintenance etc).

The point is that the number needs to be something achievable and then you work towards growing that number. Not just a number of 30%. But the biggest take away – you’ve got to save a lot more than you think.

how any one (bar the very very rich) has adequate savings to retire in sa is beyond me. the cost of private health – especially with emergency procedures not being reimbursed by medical aid being the norm. the other issue is inflation – which in most western countries is non existent. then of course is your govt that will tax anything that (or doesn’t move). then what happens hen the person has to move into frail care – who pays for this? in aus (that has excellent free health care) a govt pension that is barely adequate – one needs a minimum of $350,000 (R3.5m) – that is with getting $34,000 (R340,000) in govt pensions – free health and rebates on things like licences etc etc

Ingram correct. 15% not enough. Start on 20% to 25% asap and hold it there for a long as possible. When kids out the house you may have at best 7 to 8 years left to bump up to 30%

Ingram is spot on as usual. As South Africans we seem to suffer from too much lifestyle creep. Get a raise, spend more, get a bonus, buy a toy. Haiybo is the perfect example of where he assumes a couple earning a million a year can’t live on R460 000 a year and save R300 000 year. Ridiculous!

Silly, silly patrickza. You live in some kind of nirvana. You have to deal with realities on the ground if you want to change peoples behavior. You’d have to save 66c for every rand you spend if you want to save 30% of your gross salary. Now do the maths if it is a single headed house that earns a million instead of 2 people each earning 500k, the numbers get a lot more difficult. Most people probably save between 10c and 0c per rand spent and now you want them to suddenly switch to 66c, crazy, they’ll just ignore advice like this.

Do you have a kid or 2? Have a look at what any “decent” school costs per year, anything from 50k to 120k now double that for 2 kids (of course you could home school your kids or send them to a “bad” school but which parent does that?). This is a reality for parents and is not negotiable. Most feel you can’t trade down on education. Same for insurance. Oh and add in buying a house, having a child require surgery that’s not considered life threatening by medical aid. etc etc. Sure if you want to live in a 3 bed room flat in the middle of nowhere you can probably rent that for your family for R 8000 a month. Oh and make sure you have 6 months of salary for emergency savings (apparently it’s the right thing to have 380k for this family sitting in cash or near cash). Then also add additional savings for things like house and car maintenance etc. You’d have to save something like 80c for every rand spent to reach the right target. See how far that gets you in gets the average Joe to save more.

Why you’re at it why not make some more grand statements:
Why do people smoke, it’ll kill them – ridiculous
Why are people fat – ridiculous
Why do people drive fast – ridiculous

Keep saying statements like that and see how much behavior you change….

Many South African’s, though employed, often have impoverished backgrounds/legacy issues to first contend with, i.e building the folks a house, buying a car, take care of the siblings etc. before saving becomes an actual priority. Of coz the other side of the coin is those consumed by conspicuous, impulsive and wasteful expenditure, who just aren’t interested in saving and have more knowledge on the latest fashion trends than what their savings ratios are, so the ‘how much is enough’ question delves into future probabilities in a society that unfortunately has a very narrow outlook on life.

Lifting the retirement age will help the time that your retirement savings can grow. The benchmark of 60 was set when people were regarded as old at 60 and those who reached 70 were the minority. Nowadays it should not be strange for someone to retire only at 70 or even 75.

Haiybo’s example shows there is no way this family can live on that income and save 30%.There’s only just over 70k left and they haven’t even financed any cars never mind paid for food etc.Their medical expenses would be a lot more than 60k per annum as well.The scary thing is that this family needs to earn 1500k to have any chance of saving the 30%.

Did I read that correctly, W Ingram says 75% in equities/listed prop is a good number for a 65 year old.
If that is the case he clearly has no clue – has he read what allocations are recommended by the world’s foremost experts (from academia, not the Wall street investment gurus/advisers) like Sharpe, Samuelson, Markovitz, Fama, Bodie and Bogle. He should explain why his advice so radically strays from theirs, and what qualifies him to make these claims. Does he understand that finance is a science. If you have a new hypothesis, publish a paper and get it peer reviewed.

The answer to ‘How much is enough?’ depends on many variables unique to each person. As a rough guide one can estimate that 2/3 of pre- retirement gross income should be sufficient for the average retired couple as debt payments, child related expenses, savings/insurance fall away and taxes are lower in a well-planned retirement.
Currently a lifelong guaranteed inflation protected annuity should theoretically yield an initial 6.5% of the invested capital. Thus .67/.065 = 10.3 times the required income needs to be saved up by retirement. I calculate that someone whose salary increases by 1% above inflation for 40 years and who saves 14% per year of gross will end up with that number if they can earn a real 4% return pa. Save a bit more if you can to compensate for the possibility that returns end up lower, or needs higher.

Your argument is somewhat flawed – any married couple where the breadwinner and as such the primary contributor to the RA converts to a guaranteed inflation protected annuity is inconsiderate upon his/her death as there is no pay out to the surviving spouse after the owner of the annuity dies. Rather invest in a LA where at least the remaining spouse gets the option of continuation of the LA or can receive a lump sum

Not true- the annuity I referred to is a joint life annuity.

Sorry – that should read: 10.3 time gross pre-retirement income need to be saved up.

Sorry- the annuity referred to is for a 65 year old couple in average health.

I want to invest R2m rand that is in my money market,must I buy an extra residential property in Kimberley where the prizes are overheated or invest it for 5years somewhere My HOUSE IS PAID OFF AND I HAVE NO PENSION FUND ,im renting in a good area for my business and have 6 million life cover,almost 60 years old/good health but heavy smoker

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