People who are working and earning a salary may have a YOLO (you only live once) attitude towards life, but they forget to think about the future as well as life after retirement.
Sherwin Govender, business development manager at Glacier by Sanlam, said: “So many people in their late 20s, 30s and even their 40s think they’ve got a good life, and that it’s going to last forever, but very few consider how their lives will be when they leave work for good and no longer receive a pay cheque.”
Govender shares a checklist of things people need to do to get their retirement savings on track.
Picture your life
Govender suggests that people have a plan for their retirement that takes into account what their life will look like in 20 to 30 years time.
Will you have paid off your home? Will you have dependent children living with you? Will you be able to travel abroad? How often will you replace your vehicle?
“Dream big and the more specific you are, the clearer the picture will be regarding how big the gap is between what you have saved and the life you want to live,” Govender said.
Know the jargon and know your number.
Govender said: “If there are just three words that people need to learn relating to saving, then they are net replacement ratio (NRR). Knowing what this means is absolutely critical to ensure that you have the life and lifestyle that you want when you retire.”
Essentially, NRR is the expected pension that people will receive when they retire, reflected as a percentage of the very last salary that they earned when they were working.
The calculation gives people an indication of how much income their retirement savings will be able to create for them when they retire.
“Know what your replacement ratio is – it’s specific to you. You need to know how much more you need to save to close the gap and have the life you want after retirement. It’s that simple,” Govender said.
“Figure 1 below shows your retirement savings milestones at different stages of your working life. So, after 10 years of working, you should have accumulated two times your annual salary, at your 40th working anniversary, you should have accumulated 12 times your annual salary.”
Observe the retired people in your circle
According to Govender, people need to observe the people in their circle who have already retired – and have a look at who’s doing well or who’s struggling to make ends meet.
Govender said a person’s ideal replacement ratio should be 75% or higher of their last salary earned before they retire.
“If your NRR is 40% or lower, it is unlikely that you will be able to maintain the lifestyle that you are accustomed to when you retire. Remember, that your employee pension fund, on its own, may not be enough to sustain you when you stop working,” Govender said.
Consider all your retirement savings options
Govender said: “In addition to your retirement fund at work, a retirement annuity (RA) and a tax-free savings account (TFSA), as examples, could go a long way in closing the savings gap.”
“Also consider taking one of those out for your child. If your parents had done that when you were born, you could have been a lot further along your journey towards financial confidence.”
Do a deep dive into your debt.
There’s healthy debt such as a mortgage bond for a home, or debt that is sometimes necessary such as financing for a vehicle. Unhealthy debt is when people use credit to finance a lifestyle they cannot afford, such as clothing, luxury items or your social life.
Unhealthy debt can drain a person’s ability to save for anything – including retirement.
“It is important to remember that paying for something on credit is forking out two, sometimes three times the actual cost. Minimise using your hard-earned money every month to service debt and credit,” Govender said.
Get a financial coach
An authorised financial adviser will have a comprehensive look at a person’s finances including their income, expenses, needs, shortfalls, risk appetite and goals. A good adviser becomes a coach and a partner on your journey to financial fitness.
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