How much money you should have saved for retirement based on your age
Historically, South Africans have been poor savers. However, the onset of the pandemic, coupled with a historic economic downturn, has thrust the importance of savings into the spotlight. And for some South Africans, that reality has hit home, says Nirdev Desai, head of sales at PSG Wealth.
Desai said many people can find the prospect of saving overwhelming, but small actions taken in the present can catalyze big changes in the future. Understanding and appreciating this principle is the key to developing better saving habits.
PSG Wealth highlighted three hurdles to overcome on the path to better savings habits, one of which is not using one of the most effective savings tools available to South Africans: tax savings. advantageous. Before the end of the fiscal year, which is approaching in February, it may be useful for South Africans to keep in mind the following obstacles when it comes to savings:
RISC and its implications for life after retirement
At 12%, South Africa has one of the lowest gross replacement rates in the world. This rate refers to the percentage of an individual’s annual income while employed that is replaced by retirement income when they retire. The overall gross replacement rate is 70%.
In practical terms, this means that on average, a person who earns a monthly income of R30,000 before retirement will only be able to withdraw R3,600 per month in retirement.
Statistics also show that less than 10% of South Africans plan to retire comfortably at the age of 65, meaning they will need to work longer or save more aggressively to stay afloat during their retirement years. retirement.
RISC is one of the realities of a world where life expectancy is increasing and people are living much longer than the pension system can.
To frame your need for retirement capital at age 65, you can use the 4% rule – for example, if your required monthly income is R30,000, an annual drawdown of 4% dictates a minimum lump sum of R9 million. rands, for sustainable inflation. – maintenance of income until retirement.
Inflation – an important obstacle to saving
The cost of living in a few decades will be far greater than what it costs to maintain a comfortable lifestyle today. The effect of inflation on your savings should not be underestimated and should be taken into account.
“Inflation is insidious, occurring in increments over time without being really noticed by the general population. But a snapshot of what things cost just over a decade ago provides a telling picture,” said said PSG Wealth.
According to a Broll retail report, a loaf of white bread cost R5.89 in 2008. Today it costs around R15.81. This represents an increase of 168%. Likewise, compounded by both the effects of inflation and increases in the “sin tax”, a box of cigarettes costs three times as much as it did in 2008.
Fear and greed are stumbling blocks for savings
“Fear and greed” are terms you may hear frequently used by financial advisers, PSG Wealth said.
“In a very broad sense, these emotions are two of the most important drivers of financial behavior that affect how people spend and save money. From a broader perspective, these two emotions play an important role and often irrational in the performance of financial markets around the world.
In an initiative to improve and encourage better savings behavior, the South African government has created Tax-Free Savings Accounts that allow individuals to save a limited amount of money without tax liability.
There are stipulated caps on the total contributions that can be made to the Tax-Free Savings Account. Currently, South Africans can invest up to a maximum of R500,000 per lifetime, with account balances potentially exceeding this amount due to interest accrual, the financial services company said.
So how much should you have saved?
T. Rowe Price, a global investment management firm, said ssavings benchmarks based on age and salary can be a useful way to track progress toward saving for retirement. He said that ssaving 15% of income per year (including any employer contributions) is an appropriate level of savings for many people.
“Having one and a half times your income saved for retirement at age 35 is an achievable goal for someone starting to save at age 25. We’ve estimated that most people planning to retire around age 65 should aim for assets totaling between seven and a half times and 14 times their gross pre-retirement income,” Rowe Price said.
Hypotheses: Household income increases by 5% up to age 45 and by 3% (assumed inflation rate) thereafter. Pre-retirement investment returns are 7% pre-tax and savings grow tax-free. The person retires at age 65 and begins to withdraw 4% of their assets (a rate intended to support stable inflation-adjusted spending over a 30-year retirement).
Experian, a consumer credit reporting company, said breaking down your savings goals by age can help your total retirement savings goal feel more manageable. It can also help you determine whether or not you’re on the right track so you can rebalance short-term and long-term saving and spending priorities if needed.
Experian also showed how much money you should have saved for your retirement at ages 30, 40, 50, 60 and 67 – the ages at which you can currently start receiving full retirement benefits.
Experts have different approaches to the common question of how much to save for retirement. Investment firm Fidelity recommends saving enough to cover 45% of your pre-retirement gross income per year, since the rest of your retirement income will likely come from Social Security, Experian said.
“It is also often difficult to plan using raw numbers, as your income and standard of living can fluctuate over your lifetime. Fidelity has created savings guidelines that track your income, rather than a total savings goal, so you can identify retirement readiness decade by decade,” he said.
Here are Fidelity’s recommendations:
- At age 30: Have saved the equivalent of your current annual salary. If you earn $50,000, you should have saved $50,000 for retirement by that age.
- At age 40: have saved three times your annual salary. If you earn $50,000, you should plan to have $150,000 set aside for your retirement within 40 years.
- At age 50: have saved six times your annual salary.
- At age 60: have saved eight times your annual salary.
- At age 67: have saved 10 times your annual salary.
Read: Here’s how much South Africans are saving for retirement