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Retirement: How much is enough?

It may be time to approach the issue differently.

It is probably the question financial advisors and retirement educators get asked most: How much money do I need to sustain my lifestyle in retirement?

It is a straightforward question, but unfortunately it depends on so many variables (many of which will be dependent on individual circumstances) that the answer is not so straightforward.

Research suggests that a capital sum of 17 times a person’s final annual salary before tax will produce an income equal to about 75% of the last salary if the individual retires at age 65, Jeanette Marais, director at Allan Gray, says.

She cautions however that the model makes a lot of assumptions, and that living off 75% of your salary can only work if you don’t have a mortgage when you retire and are debt-free.

The calculations also assume that people don’t have any dependents they still need to support in retirement and that they are able to reduce their living standard to some extent.

“The capital amount of 17 times will also only be enough if you keep on earning real returns right through your retirement [and] if you withdraw sustainable amounts when you start to draw an income.”

Investors would also have to avoid some mistakes along the way.

To be on track to reach a capital amount of 17 times at retirement, an individual would need to have saved an amount of two times her annual salary after working for ten years and ten times her annual salary after working for 30 years.

This is a tough ask, particularly in a low-return, difficult economic environment and against a background where many people focus on immediate, rather than long-term goals – sometimes out of necessity.

“In my mind the greatest destroyer of retirement capital is the fact that more than 80% of South Africans today take their retirement savings when they change jobs.”

This means that they restart their savings pot, potentially shorten their savings horizon and lose out on a significant amount of compound interest over time.

Where investors only start saving at a later stage, they would need to save significantly more to be in the same position at retirement (see table below).

Source: Allan Gray

But Mike Wilmot, head of investments at Nedbank Private Wealth, warns that the number of 17 “may or may not” turn out to be correct based on how the reality differs from the assumptions.

More importantly perhaps, whether the number is appropriate, will depend on the specific factors affecting the individual.

Conceptually, the methodology is correct, adds Winston Monale, managing executive for wealth management, global investment and solutions at Barclays Africa Group, but the assumptions may prove difficult to achieve in real life.

Getting a return of 10% in the current environment is extremely difficult, he adds.

Moreover, the reality is that only a very small portion of South Africans can sustain their standard of living in retirement.

“Somewhere around 5%-6% of retiring individuals actually are financially independent,” Monale says.

Even among high net-worth individuals, the retirement savings numbers don’t necessarily inspire confidence.

Monale says the average salary in the private banking division is roughly around R1 million per annum.

According to the model, these individuals would have to have saved roughly R5 million for retirement by their early forties.

“That is not the reality that we find.”

While the assumptions may prove difficult to adhere to in reality, “this kind of approach” that tries to commit people towards a savings plan “is a good one”, Monale says.

Although the numbers may look staggering and feel impossible to achieve, perhaps the more important discussion South Africans should have is how to set themselves up for “unretirement”, a world where they continue to work and contribute after the age of 65, although this work may be something different to what they did before, and may not toe the line of an 8-to-5 schedule.

Wilmot says the two-stage model of work, where an investor accumulates money while working, retires, and draws down the capital is arguable outdated.

The move from defined benefit to defined contribution funds and greater life expectancy have led to structural changes in the retirement industry and investors will likely have to rethink their approach.

Wilmot says a retirement age of 65 is no longer realistic.

“I think it is important not only from a financial planning perspective, but also from a wellbeing and a general sort of advisory perspective, that you want to be productive. You want to invest into your human capital and you want to be able to draw on that investment perhaps post formal retirement in a corporate.”

This has a major bearing on how much money an individual will need.

A phased retirement could also help significantly in the event that there is a major market correction or protracted bear market around the time that someone retires, which may increase the risk of running out of money significantly.

“People do need to and should work for longer,” Wilmot adds.

Marais says if an investor could postpone retirement by only five years, the individual can score almost 15 years because they earn an income for five more years, contribute to their pension fund for five more years and have five fewer years to live off the income.

While numbers could provide a baseline for people to work towards, there are many things investors can do to work around that, she adds.

For the best chance of achieving your retirement goals, there are some basic principles that can help.

The first is to implement a proper financial plan for short-, medium- and long-term needs, she says.

The second is to start saving as soon as possible (if you haven’t already) in order for compound interest to work its magic.

The third is to realise the importance of real returns – returns in excess of the inflation rate.

“If you do not earn real returns from the moment you start, right through retirement – and don’t get too conservative when you get to retirement age – you will not be able to reach these goals, because inflation is going to be your biggest enemy,” Marais says.

The fourth is not to time the market or to switch investments in an effort to chase returns.

Finally, it is important to construct a well-diversified portfolio with sufficient risk and volatility protection.

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oh dear. i’ll say it again – you will NEVER have enough to retire on if you rely on a 3rd world country-which is about to be junked- to provide benefits that other 1st world countries provide free. elsewhere today I have written about a brand new cancer treatment (which I am pleased I have gained financially from). that procedure is going to cost US$350,000. in aus that is likely to be subsidised by the govt and will cost aus$38 per procedure. how can any 3rd world country afford this??? never mind a country about to be junked

You are definitely not stupid but you are one of the most obtuse characters I have come across on MW. Since you have benefited financially from this new cancer treatment I do hope you are in remission soon.Since it is only $38 per treatment, no worries mate.

You seem to take pleasure in the fact that cancer patients in 3rd world countries will not be able to afford this new treatment.

Get well soon.

Robsnout in Sydney did not experience the new treatment and I don’t think he knows how debilitating this illness is on patients and their close family. No Bibap, he only made money off biotech investments and he just can’t help himself to continuously place himself and Aus on a high and mighty pedal-stall whilst always seeing the worst in S.A. and it’s people. His comments does not befit a man of his elderly age. The only reason he so passionately still follows the South African financial news and regularly providing his obtuse comments, is because he is so very home sick for S.A. and it’s wonderful people. So we have to bear with and excuse the Robsnout of Sydney.

Bloviating Bob the washed up smous is now selling his version of retirement. The poor (literally) chap believes that the benefits ‘countries’ – read governments – provide, are free. He’s either slowly going demented, or is a paid up commie, or just plain stupid. My guess: a lot of all three. Countries don’t do things Bob, people do things, meaning nothing in life is free. Someone will have paid for whatever subsidies you’ve been promised.

See Bob, there are only two ways that governments can come by any money: 1) taxes 2) printing money. The first option they take from rich Peter and give to sick Paul.That is the $350000 to $38 bit you brought up above.
In the second they take from everyone by devaluing the currency, so what should be a $380 procedure eventually ends up costing $350000.

France, I was attempting to be sickly facetious in my illogical deduction about Robert in Sydney having cancer – all apologies. I am a bit sensitive on the subject of cancer at the moment since my daughter was diagnosed with melanoma in Aug 2015 and she is at end of life at the age of 36. Her pension is adequate.

Regarding the topic of how much is enough, the most astute actuary on God’s green earth cannot calculate this exactly so Robert in Sydney is correct in saying NEVER, since there is one metric that none of us have – DATE OF DEATH. Insurance brokers and fund managers have to make many assumptions and tend to use a best case scenario regarding life span after retirement and worst case scenario regarding inflation. The implication is that they over-estimate rather than underestimate and this I can agree with. It is also to their advantage since they will collect higher commissions/fees from the day you pay that first premium.

I retired (resigned) at age 48 in 2004 whilst a colleague and good friend of mine, who was 59 years old at that stage, decided to work until age 65 which of course made him more financially secure than I when he retired in 2011. My friend passed away in May this year; less than six years after he retired. Draw your own conclusions.

I believe Supersunbird and Finfit are on the right track. Use your favorite spreadsheet (Excel); draw up a proper monthly and annual budget. Educate yourself about present/ future values and the effect of inflation. Draw up a budget for the next n years until age 75 and make provision for unexpected expenses. The final total is roughly your ENOUGH number. Don’t despair.

So, Robert in Sydney, earlier today when I read your comment, I made a somewhat snide remark and apologise for that.

Easy, they buy it from India where they do not recognize foriegn intelectual property.

Here they are in a country that is riddled with BIG PERSONAL DEBT and they are selling retirement again. Most companies have a pension or provident fund. Fully fund that and use the rest PAY OFF DEBT. On a R 1 Million home the first 5 years (R10,0000 p/m) is all interest. They want you to start some savings whilst you are paying R 10,000 per month in interest. Paying off your bond in 7 years could give you about a 180% return on your money. I have watched people pay HUGE interest whilst their old school retirement annuities were paltry at best. Between the debt interest and inflation YOU ARE GOING BACKWARDS!They tell you to do this and you will be OK, THEN 95% don’t make it!

Well, you are not going to eat your house when you retire or pay your medical aid with your house (Robert has a point above). It’s also about balance. Ideally one should try to minimise any personal debt in the first place, not get personal loans and clothing accounts and such.

What is your comment if the person does not have big personal debt? My total current debt is about 1 months net salary worth. The debts death bed is before end of this year.

A week away from 39 and saving about 24,5%pm into retirement (in work fund and unit trust new style retirement annuity), which I will try to push up to 27.5%pm beginning of next year.

I wish I could have saved more earlier, after 9.5 years of employment I am on double my annual salary, I am aiming for being able to retire at 55 (view it more as financial independence), so saving up as if that is the target, if I don’t meet the target I can easily postpone till 60 or whatever and the compounding of the savings made now, will be great.

Well, your point on the home has validity, using your example, before 40 the home is paid off and 15% saved pm in work fund, and then one better start saving a lot of that money you now have because the home is paid off, for retirement.

Excellent comments SS.

Even with high debt: pay off the credit card/hp/personal loans 1st.

Then:a bias to the at bond but at least 25% of cash available to long term savings. Returns going fwd are expected to be low. If one does not start asap there is not going to be enough to live on.

Of course you have to be debt free as soon as possible, and also limit any debt to “good” debt, i.e. mortgage bond on a primary residence. It’s not a question of the one or the other. Get debt free as soon as possible AND provide for retirement. That requires financial discipline and not living beyond your means.

R 10,000 A MONTH

What you point? For the bank to allow you to get a R1 mil home loan, and the homes associated costs, your (or couples) gross salary must be about R33 000 per month at least. It’s not like you are on the poverty line.

Another really decent article from Inge. It doesnt matter whether you have enough (or will have enough) for retirement. You are getting older and the time will come when you have to live off what you have saved. So anytime you start thinking about it is good. I dont quite agree with all the views expressed but I think they are well worth discussing and thinking about. Inge mentions “unretirement” and that means taking your human capital value into account. In other words when you retire at say 65 what value do you place on your ability to continue earning? What does your prior education, training, skills, and experience mean? The longer you can keep earning (while still feeling useful) the better your income potential when you finally retire.

A comment on inflation. Most of us have no idea what our personal inflation rate is. If, as we suspect, it is mostly higher than the national average then the earnings of portfolios probably need to be seen in a different light. For example, if your personal inflation rate is say 7.5% per annum then a portfolio earning official inflation (6.3% say) plus 5% is in fact giving you inflation plus 3.8%. That needs some thought about establishing an affordable standard of living and how to manage your personal inflation.

Too many assumptions produce numbers that are pretty meaningless.

RL Stevenson put it best when he said: “Everyone, sooner or later sits down to a banquet of consequences.”

In the US, they have a great retirement option called reversed mortgage.

If you have a paid of house the day you retire, banks make assumptions about market value and forecats and longevity.

They will then, say determine you house is worth R5 mil today and willing to lend R4 mil against it. You are expected to live 10 years. They then work out a monthly payment TO YOU like a normal mortgage but just the other way around. Working from R0 to R4mil over 10 years.

Come 10 years you sell your house to pay the debt and take te remainder and buy a retirment room.

Whats great about it is you delay the uprooting of people from their know environments and support structures while they are still quite active community members. Delay CGT. Also, a lot of stats in SA point to our healthy house ownership levels and this can unlock that value without the negative impact of moving. And saving at 10% before tax guaranteed at the moment by paying your debt, is then truely contributing to retirement

Popular in the UK too. http://more2life.co.za/ and others in SA offer this on a small scale. In the US the use of deferred annuities is also widespread and would be particularly useful in SA: pay a lump sum at 60 or 65 (or contribute monthly) to get a CPI linked income from age 80 or similar. You get nothing if you don’t make it to 80 which keeps the lump sum cost down. Anything risk pooled like this would be hugely beneficial in SA since retirement savings go further when risk pooled but people still seem to like the flexibility and potential payout to heirs of a living annuity.

Great if u want to live in a room.

Well, living in a room at age 80 beats the hell out of moving to a small plattelandse dorpie at age 65 becuase you had to sell your debt free house just to access the wealth stored in this asset.

Your primary residence is only worth something in your retirement if you can unlock the value. A reverse mortgage unlocks this value without (albeit by delay) the negative impact of moving.

The numbers don’t seem to add up. If you are male and earning R1m at age 65 today and would like a 75% income in retirement you need to earn R62,500 per month. An inflation linked annuity for life today can be bought for around R6,000 per month for R1m invested. So that is R10.4M required which is 10.4x annual salary not 17x. Apart from possibly reduced expenses, this ignores that you would be slightly better off at 75% than you might think as 1) your tax is slightly lower and 2) you aren’t contributing to a pension fund anymore – as some have mentioned your pension fund contribution is likely to be in the order of 20% to hit the 10.4x number – so your take home might actually be higher. So, with slightly lower expenses, maybe you can get away with 60-65%.
Also worth looking at other developed markets to see that our saving rates aren’t that far out of whack:
https://www.cnbc.com/2017/04/07/how-much-the-average-family-has-saved-for-retirement-at-every-age.html
Sure – the US has Medicare for the elderly – but there is not much in the way of state pension.
A significant problem is that working to age 65 in the corporate world – especially in a developing market is less uncertain. Many SA corporates now have NRAs of 60 and even then forced early retirement in one’s late 50s is more likely unless you have very specialised skills. Professionals and business owners have more options to work for longer.

Pray tell, what company offers a guaranteed for life inflation increase annuity of 6K/Mil. (I don’t have actual rates, but would be pleasantly surprised if you can find 4K/Mil)

I find these articles very interesting as it in most instances addresses the concerns around starting early with some sort of plan.
There are 2 aspects which are not really touched on (I retired at 58 and have no regrets and didn’t find alternate employment on retirement but immersed myself in my hobby) 1) the issues around commuting a sizeable portion of ones pension funds – this should be outlawed 2) robotics- systematically robots are taking over supposedly menial jobs but this is changing and we will get to a stage where robots will manage and/or perform 60% of human activities – where as a human are you going to generate your pension. The consequence of this robotic intervention is that the average employable person may have a work span of 10 to 15 years then they become too expensive for the company and are retrenched – there will be no job satisfaction as you will constantly shift jobs and in different fields of endeavor just to accumulate an acceptable pension

Articles like this one are nonsense!!! A waste of time!!!

They are trying to sell products that’s all !!!

Pray tell, what are they selling?

it is definitely possible – personally we have saved and invested enough to be financial independent before 40. There is nothing special about it, just requires luck, hard work and hard choices.

I think that in SA there will be masses that can never retire obviously, but off a reasonable middle class salary think there are quite a few that could do it, if that is what they wanted.

That R10000 per month is what you’re going to spend on medical expenses if you’re lucky!

Hi Guys,
I am a CA and a portfolio manager and happy to share my ideas here.

This is the approach I use:
1. Determine you current monthly budget. Adjust budget for major events eg marriage, kids.
2. Use the above to determine what you need to maintain a similar lifestyle when you retire e.g. forecast your monthly income needs after retirement
3. Discount the monthly income needed by the rate of return at retirement to get the investment amount
4. Adjust for margin of safety and capital expenses (car, renovations et al)

So lets take an example:

Monthly Budget of family of 4, 2 adults, 2 kids at school is say R 50k per month.
Remove the school fees from this amount (will add that back later)

Say net of fees the amount is R 30k (10k per kid, using round numbers for ease)

So lets say you need the same amount when you retire.

Now, lets say retirement is 10 years away. This means that monthly amount required will increase to say R 50k per month (calculation: 1.05^10, 5 percent CPI with 10 year compounding).

OK. now you know that the current Govt saving bond rate is around 7% per annum. So 50kx12/0.07 = 600,000/0,7 = 8.6m.

Now, lets say you have R2m saved up already in a Unit Trust or property (excluding the property that is your primary residence)

This R2m should be worth 2×1.07^10= 4m, so you now need the remaining R 4.6m (R8.6m-R4m) Usually the return on the unit trust should beat the CPI number, hence the reason for compounding the amount at 7%.

To this amount add some provision for capital expenses etc, and say you round off to R 6.0m invested sum.

So the aim should be to save R 6.0m over the next 10 years, AFTER adjusting for the school fees i.e. net of school fees.

A way to meet any shortfall is to a) increase your other income b) adjust the amount for moving into a smaller house – ie. take out the gains from your current residential property to reduce the amount. However this should be avoided as much as possible and only kept in dire cases.

Think of the R 6m as a home loan that you need to pay over the next 10 years and the calculation of the monthly amount becomes clearer.

Now, for the most important point: the KEY TO RETIREMENT IS PASSIVE INCOME. If you can start earning a passive income the whole thing becomes very easy and achievable. Just by common experience you know that people who buy investment properties and save the rentals to buy more investment properties are the most prepared for retirement. This is an ideal all should aim to follow with the caveat that you are extremely careful not to overpay for the investment properties.

Hope its useful.

I wonder how many of the 5-6% of financially independent retirees are retirement annuity salesmen living off everyone else’s fees and commissions.

Even today I don’t think the impact of fees in this ‘industry’ is generally appreciated, because they’re not tangible as cashflow. The improvements in disclosure in recent years –
which still falls far short of explaining the long-term effect – aren’t much comfort to the generation retiring now, who have been fleeced for most of their working lives.

I still see products that charge for commission notionally ‘paid’ to nonexistent advisers. And advisers who, in the same breath, tell you that a 4.5% drawdown on a living annuity is prudent, while the total fees in the product structure come to 2.5% (that’s the equivalent of 36% added on to your marginal income tax rate).

Go to 10X for low fee RAs

It’s a bit of a one-size-fits-all product. I’m still shopping around, but Sygnia with a skeleton fund would be my low-cost choice so far.

Why 10x if there are lower cost options available like Sygnia?

They are both showing us what a ripp-off we endured. Avoid these advisors. Educate yourself – read,read, read

Alan Grey and Coronation also provides for retirement insurance. Their products are good. Pay a financial adviser once ( R800 to R1200 per hour) and every five years make changes IF required.

And so the biggest CON continues. Advised that I will live a comfortable life by withdrawing 4,5% of my retirement annuity. Well and good, but the charges will be around 2%. I spent my whole bloody life trying to accumulate for my retirement and now have to share my retirement with a con artist! The 2% seems paltry but when you compare it to 4,5% of withdrawal, it is fairly a large chuck that you are conned out off. I would rather prefer to pay R1,200 per hour for advise rather then being conned.

My point exactly. On one of my old-style policies (in Namibia, which still has these) it actually turns out cheaper to draw at the maximum rate allowed, take the tax on the chin and reinvest the capital privately, than to suffer the full fee burden over the long term.

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