If you were forced to retire tomorrow, would you be able to retire comfortably? This month, we discuss how spending a little bit more today can help you save more in future for retirement.
Let’s unpack how far your savings will bring you during retirement by using the following example. Bear in mind that the example we use has been simplified for the purpose of providing a very basic understanding.
By using TaxTim’s retirement savings calculator, current contributions mean Mr X will retire with R2,028,866 at age 65. Note that this figure is what he will retire with in today’s terms.
Retiring with R2 m
Mr X would like a retirement income of R40 000 per month to live comfortably during retirement. Bear in mind that tax is also deducted from this amount. His home mortgage is settled, therefore he spends his retirement income on groceries, medical aid, short-term insurance, petrol and holidays for him and his wife.
For the purposes of simplifying the calculation which is a lot more technical in reality, let’s suppose that Mr X’s retirement savings of R2 m does not receive any growth.
Therefore, Mr X will only have enough money to last him 4 years after retirement.
Retiring with R5 m
If Mr X adjusts his retirement annuity contributions to save R5 m by retirement, his savings will bring him this far:
Therefore, Mr X will only have enough money to last him 10 years after retirement.
Retiring with R10 m
Let’s consider a final example. Mr X’s adjusted contributions to his retirement annuity enables him to save R10 m by retirement which will bring him this far:
These examples illustrate the importance of investing your retirement savings appropriately to ensure sufficient growth every year and to avoid outliving your savings during retirement. It is also crucial to settle as much debt as possible before retirement.
If you plan to retire at the age of 65, it is ideal to make provision for 35 years of retirement. By bearing the abovementioned examples in mind, you can see what a difference it would make if Mr X decided to only retire at age 70 instead of 65, or to adjust his RA contributions as much as possible to save more for retirement while he still has an income.
Adding a little extra per month
In the first example, if Mr X contributes only R1,550 more per month to his RA, he could retire with R3,077,114 which is R1 m more than the R2 m he currently has for retirement savings.
If you are 25 years or less from retirement, it is crucial to review your retirement savings with your financial advisor to consider the following:
- How far are you from settling your home mortgage and other debt?
- Is the retirement savings amount you are saving towards enough to sustain you financially for 35 years of retirement?
- How much extra could you contribute towards your RA now to increase your retirement savings?