Most people want to know how much money they will need to retire. Financial adviser Gerry Pienaar gave members of the ipac/Personal Finance Investors Club some tips.
If you do not lay the foundations early for your retirement, you will create a black hole that will devour all your energy and attention, says certified financial adviser Gerry Pienaar.
Pienaar, who was speaking at the ipac/ Personal Finance Investor's Club in Johannesburg, says to attempt to plan for the future on shallow foundations is a recipe for disaster, particularly with most people now living longer but retiring earlier.
In building up your savings, you also need to take account of the effect of how much time you need to meet your targets.
If you want to retire at age 60 with a lump sum of R800 000 (assuming a 15 percent investment return), you will need to save: R152 a month, if you start at age 30; R310 a month at age 35; R643 a month at age 40; R1 383 a month at age 45; and R3 240 a month at age 50.
So, the longer you leave it, the more difficult it will be to establish a sound foundation for retirement.
Then when you reach retirement you have to consider how long you will live.
In 1776, life expectancy was a mere 35 years of age; by 1880 it had increased to 45 and by 1995 was up to 75.
The world's first pension fund was also launched in 1880 with 65 being the retirement age - so few people benefited.
Now, most people can expect many years in retirement.
If you retire at age 55, you can expect to live on average until age 77, with 22 years in retirement.
If you retire at age 60, you can expect to live on average until age 78 with 18 years in retirement.
If you retire at age 65, you can expect to live on average until age 79 with 14 years in retirement.
If you retire at age 70, you can expect to live on average until age 82 with 12 years in retirement.
But Pienaar says these are averages worked out by actuaries. You could live for a shorter or longer period. He says you should look at your own family history. If you have relatives who have lived to an advanced age, you should take this into account as you may need more money for retirement.
Pienaar says inflation is one of the major factors you have to take account of, as it can undermine the buying power of your pension in the long term.
The question most people ask is: how much money is enough? Pienaar says the rule of thumb says 10 times your gross annual income as a lump sum will be sufficient.
However, he feels the better calculation is based on an expected rate of return on your investments and your lifestyle.
The rule of 25
He says you can calculate this by using what he calls the Rule of 25, based on reasonable assumptions of investment returns and inflation.
- Take your expected rate of investment return of, for example, 12 percent;
- Subtract expected inflation of eight percent, leaves you with four percent;
- Divide 100 by this real rate of return (100 4 = 25);
- Calculate your expected annual expenses (say R120 000); and
- Multiply your expenses by 25, and this leaves you with R3 million.
Pienaar says with help from your financial adviser, you need to take a view on:
- Your expected rate of return;
- The expected inflation rate; and
- Your expected expenses.
Retirement planning does not require rocket science, but it does require you to plan, he says.
"Draw your own life road map starting from where you are now and your final destination, with a plan on how you are going to get there."
He says you need to choose with care every day how you spend or save your money.
Make the first deduction from your income go towards your retirement savings.
You should also get the best advice money can buy. He says by getting good advice you will make your trip much easier.
"Tomorrow's comfort requires today's attention," Pienaar says.