They’re called golden years for a reason – retirement should be a time to relax and enjoy the hard-earned fruits of one’s labours. But, with the increasing cost of living and the ongoing battle to make ends meet, your retirement years can turn into a nightmare. Not to mention the fact that human beings are living longer, which means the prospect of running out of money during retirement is a real possibility.
For these reasons, you should not only save as much as possible, but you should also start saving as early as possible. Sit down with your financial adviser and draw up a retirement plan aimed at suiting your personal needs and circumstances, and providing you with sufficient income in your retirement years. As you progress in life and your personal circumstances change, you should regularly revise and/or adapt your retirement plan where necessary.
There is no simple approach to retirement planning. Taking into account factors such as your financial needs and goals, your health and expected life span, and the degree of risk you are prepared to take with your investment, your financial adviser will calculate how much you should save at various stages of your life.
As people generally live longer these days, coupled with the impact of inflation and rising living costs, it’s no longer sufficient to save only 10% of your gross income, which used to be the yardstick. Based on income replacement ratio (IRR) calculations, financial advisers estimate that you should save at least 15% of your income if you have 40 years left to retirement and have saved no capital, 18% when you have 35 years left to retirement, and 22% if you have 30 years left. If you have only 20 years left to retirement and have saved zero capital, you should save as much as 36% of your income.
Another way of looking at retirement saving, is to work out how much you should have saved towards retirement at certain points in your life:
Working for 10 years (age 35) = 2 x annual salary
Working for 15 years (age 40) = 3 x annual salary
Working for 25 years (age 50) = 6 x annual salary
Working for 30 years (age 55) = 7 x annual salary
Working for 40 years (age 65) = 12 x annual salary
In conclusion: Retirement planning is not something anyone can put on the back burner. In a rapidly changing world, it commands our full and ongoing attention if we want to retire without financial worries and woes.
By Wilma de Bruin