AS a certified financial planner professional and co-author of the best-selling book The Ultimate Guide to Retirement in South Africa with award-winning editor Bruce Cameron, the most frequently asked question I receive from potential clients is, “How much will I need to retire comfortably? How much is enough?”
Planning for retirement is an important part of life that needs careful thought and planning. This is especially true now, when the Covid-19 pandemic, the Russian invasion of Ukraine, and the rampant corruption in South Africa have all caused economic uncertainty.
Trying to figure out how much money you will need in retirement is hard, especially when you are young. Saving for retirement is, at best, an imperfect science. When you are retired, the assessment is also hard. This is because of things like changes in the returns on investments and how smooth those returns are, interest rates, inflation, and your health.
The short answer to how much you need for retirement and how much capital you need on your retirement day to ensure a financially secure future is: as much as possible. The real answer is much more difficult. And it is not a one-time solution. The issues must be revisited on a regular basis.
The most important question you must answer is, “What kind of retirement lifestyle do you desire”. This is a complicated question that involves the following elements:
- Where you want to live in retirement: If you want to live on Cape Town’s Atlantic Seaboard, you’ll need a lot more money than if you want to live in Loxton, Karoo. Not only will property in Cape Town become more expensive, but so will rates and taxes.
- Assisting children: An increasing number of retirees find themselves financially assisting their children and grandchildren. This is true for both the rich and the poor. A social old-age grant is estimated to support five people on average. Education is becoming increasingly expensive, and grandparents are increasingly contributing to these costs from primary school through the tertiary level.
- Healthcare: Will you be satisfied with a hospital plan rather than a comprehensive plan? It has the potential to be a double-edged sword. A hospital plan may cost less, but non-hospital treatment may cost much more than what you save on contributions.
- Food: Eating out at top restaurants most nights is far more expensive than preparing simple, healthy meals at home.
- Travel: Many retirees prioritise domestic and international travel. Aside from finding tourism appealing, many retirees have children and grandchildren all over the world whom they would like to visit.
- Automobiles: Two cars, one car, or no car? And, if so, what kind of car? Most people can get around using public transportation and Uber, and it will be far less expensive than owning a car, especially a luxury one.
- Keeping up with the Joneses: This includes everything from banking with an expensive private bank to having a low-cost pensioner account at a high-street bank, as well as learning about and utilising pensioner discounts. Pensioner discounts, which are numerous, can range from a discount at certain stores on certain days of the week to cheaper meals, especially during off-peak hours. The internet has made it easier to learn about these discounts.
This, however, is not the end of the story. Here are some additional factors that will influence your lifestyle choices:
- Bequests: The more money you leave to your children or grandchildren, the less money you will have to spend on yourself. This will also influence the type of pension you select.
- Age: When you plan to retire and how long you expect to live in retirement are all important considerations. At 65, men have an average life expectancy of 83 years, and women have an average life expectancy of 88 years. But keep in mind that these are averages. You could live much longer, which means you’ll need more money. According to the 2022 Just SA retirement survey, only two out of every five pensioners believe their income will cover their monthly expenses if they live to be 100.
- Amount of wealth accumulated: The more you have, the sooner and/or wealthier you will be able to retire. This includes your discretionary savings as well as any money in a tax-advantaged savings vehicle, such as a pension from a retirement fund.
- Dependants: People who rely on you for financial support will deplete your retirement savings. This could imply that you will not have enough to live on.
- Debt: You don’t want to enter retirement in debt. If you have debt, you must repay it as soon as possible.
- Tax: Death is a major tax event. Your estate is subject to estate duty as well as capital gains tax. This may necessitate either additional assurance (premiums are much higher as you get older, reducing your income) or leaving a portion of your assets untouched (again, reducing your income).
- Investment returns: Even if you believe you will have enough money in retirement, your position may change dramatically due to poor or volatile investment returns.
- Inflation: Inflation can have a significant impact on your retirement savings. These are some examples:
- Pension increases below inflation: Pensioners in the Transnet Second Defined Benefit Fund have faced years of increasing destitution because of lower-than-inflation increases. Their maximum annual growth is limited to 2%, well below average inflation.
- Investment returns: The risk that inflation will outpace your returns because you are too conservatively invested, resulting in negative ‘real’ returns.
- Healthcare inflation: In recent years, the cost of healthcare, both actual costs and contributions, has risen significantly faster than average inflation. Some of this inflation is frequently concealed by reduced benefits.
The best way to determine how much you need for retirement and when you can retire is to have your overall financial situation reviewed by a properly qualified certified financial planner. This is known as a financial needs analysis.
A financial needs analysis, also known as a “fact find,” can help you with a variety of tasks. It will:
- Determine how much you require for retirement and other financial goals;
- Determine whether you can afford to retire and when you should retire;
- Determine the needs of your dependants if you are no longer able to provide for them;
- Determine how to structure your medium- to long-term financial plans;
- Tell you what you can and cannot afford; and
- Clarify your retirement lifestyle goals and, on occasion, serve as a wake-up call. And for some, this might be a shocking wake-up call.
When it comes to determining how much money is needed for retirement, no two people are the same. You must make decisions based on your needs and your ability to pay for those needs, regardless of your age or lifestyle group. The most important thing is to plan ahead of time. You will never arrive if you do not know where you are going!
In conclusion, a secure retirement requires careful planning, professional advice, and an active role in managing your retirement funds.
My best-seller book, The Ultimate Guide to Retirement in South Africa, co-authored with award-winning editor Bruce Cameron, provides readers with comprehensive information on retirement planning in South Africa. For more information about the book, visit www.retirementplanning.co.za or email me at wouter@ascor.co.za
