How much is enough? How much must I save now to achieve this unknown amount by some indeterminate point in the future?
Both are million-dollar questions, says Michael Rossouw, senior investment consultant at 10X Investments.
In rand terms, there is no one correct answer, because we all have different incomes and lifestyles. If you can live comfortably on R10,000 a month, then R2 million is enough for a decent retirement; but if you need R50,000 a month, then even R5 million will be too little.
Having ‘enough’ means you can maintain the standard of living you are used to for the rest of your life.
There are so many unknown variables in this equation – your retirement age, your lifestyle at retirement, future inflation – that it may seem impossible to solve.
Not knowing what investment returns you are likely to earn also puts a huge question mark on how much you need to save every month, to make the whole thing balance.
Fortunately, it’s much less complicated than it sounds.
First off, don’t set your savings goal as a lump sum amount – such as R5 million – but in terms of the monthly income you need in retirement. This can then be worked back to the size of the retirement pot you need.
Secondly, ignore inflation for this calculation. You may think now that R5 million is plenty for a comfortable retirement, but you probably won’t think so in 30 years.
If inflation averaged 5% over time, then R5 million in 2050 would be worth only R1.16 million today. A R16 loaf of bread would cost you R70 by then.
No one knows what future inflation will be, but whatever it is, it will also manifest in your salary growth and investment returns.
As both your savings and your future expenses are subject to the same inflation, you can ignore this issue here.
This way, you can relate your retirement income needs to your current income (lifestyle), and work with real (after-inflation) investment returns.
Unlike nominal investment returns, the range of real returns for different asset classes is quite narrow over the long-term, so it becomes possible to calculate how much you should save every month, based on your particular circumstances, to reach your goal.
Calculate your future
This is what retirement calculators do, notes Roussouw. They work out your savings goal, according to your current age and salary and your retirement date.
The 10X Investments online retirement savings calculator highlights the example of a 33-year-old who has no retirement savings, earning R34,000 pm.
Relying on a few basic inputs (age and current salary) and a couple of default assumptions (retirement age of 65; the salary is expected to grow at 1% pa in real terms; a 60% final salary replacement ratio), this person would be targeting a retirement income of R28,000 per month.
This translates into a savings goal of R5 million.
The calculator allows users to modify their savings goal, according to their expected retirement age and desired final income replacement ratio.