Time is everything. How much you need to save for retirement depends on your age. The earlier you start, the more you can gain from investment compounding and the less you must save per month.
Here are three retirement rule of thumb calculations (Remember that none of these formulas guarantees a good retirement. These are broad-based general accepted principles)
For every R5 000 monthly pension required, save R1 million.
- According to this method, you’ll need R1 million invested in an annuity for every R5 000 per month you want to draw as income after retirement. R5 000 is a conservative and sustainable estimate to avoid eating into your capital. If you want an R30 000 monthly pension, you must save R6 million by retirement.
Multiply your final annual salary by 15.
- You would earn R360 000 a year if your take-home income is R30 000 per month in your last year. You’ll need 15 times your annual take-home wage, or R5.4 million, to sustain your lifestyle after retirement. To travel or pursue hobbies you didn’t undertake while working, multiply your final income by 17 or 20 or more.
Monthly needs multiplied by 300
- To calculate the lump sum, you need to save (R9 million in our example), multiply what you anticipate you’ll need per month (say R30 000) by 300. This choice yields a greater result than the other two which is good.
How can you assure a comfortable retirement?
- Consult a retirement professional and plan.
- You should also prioritise future self-payment. Save or invest before the end of the month. As soon as you get paid, invest for retirement.
- Little changes can have big, life-changing effects.
- Ensure your investment portfolio asset allocation is right. Diversifying among asset classes throughout retirement protects capital.
- Understand the effects of high fees. Do your research on investment management costs, which compound over time.
After trying one of those estimates, you may want to save more! We don’t save enough as a nation. The South African Reserve Bank reports that the average South African spends 75% of their paycheque on debt. Only 6% of South Africans can retire comfortably.
Be one of the 6%, not the 94%!
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Kindly note this article is intended for general information purposes only and does not constitute accounting, tax, nor regulatory related advice. Should you need advice, please contact one of our practitioners.