 Studies show that most individuals will need a retirement income equivalent to between 60% and 90% of their pre-retirement income in order to maintain their current standard of living during their years of retirement.
To achieve this, many individuals must start to save at the first opportunity. By starting early rather than delaying your savings for a few more years, you can considerably reduce the amount you save every month to reach your retirement goal.
Example 1
Tom and Dick, both aged 21, start their first job where they receive the same salary. They share the same apartment and split their household expenses equally. During the first week at work, they attend a seminar where they learn about the benefits of participating in their employer's RA plan.
Tom decides to start saving R1000 from each month's salary. Dick, however, wants to wait until he is older before starting to save. If we assume an annual rate of return of 6%, Tom accumulates approximately R165,000 after 10 years. Dick starts saving at age 31, and like Tom, decides to save R1000 per month. By the age 65, Tom's retirement account would be about R2,597,000, while Dick's account balance, started 10 years later, would be about R1,337,000.
Dick could try to accumulate R2,597,000 by age 65, but because he started 10 years later than Tom, he would have needed to save about R1,942 or nearly double Tom's, each month in order to reach that goal.
How much is enough?
Your financial planner may be able to help you determine the amount you need to save in order to maintain your pre-retirement standard of living. Understandably, factors such as inflation and changes in income tax rates may alter the projected amount. However, having an idea of what you need for your future retirement makes it easier to determine if you are saving enough. The following example illustrates how to determine how much is enough.
Example 2
Sam meets with his financial planner who determines that Sam needs to accumulate at least R1,000,000 by the time he reaches his desired retirement age of 50. Sam's monthly-required savings is determined by his projected rate of return, the amount he has already saved and his current age.
Sam is age 25 and has a savings of R5,000. Assuming an annual rate of return of 6 %, he will need to save an additional R1,400 each month to reach his desired goal. If Sam were 30 years old, his required savings would be approximately R2,100 per month: a five year delay increases Sam's required savings by R700 per month.
On the other hand, if you are unable every month to save the amount required to reach your goal, you may still want to save whatever you can afford, as that will help defray your expenses during your retirement years.
Early financial planning helps to ensure a financially secure retirement. Explore all the options that are available and choose the ones that are right for you. Be sure to inform your financial planner of all your other expenses so that he or she can help you to make realistic plans. Remember, if you plan to start later, later may never arrive, as the reasons for putting off saving for retirement may increase if your family grows, such as bond payments and college expenses.
John Bruckmann is an Executive Financial Planner at Momentum. He can be contacted at tel 011 292 2362/ cell 083 604 9418/ fax 086 557 3620
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