How much is enough to save for a comfortable retirement?
The answer varies by individual. And it depends on your income now and the lifestyle you want in retirement.
No matter where you are in your money journey you want to start building on your retirement fund. This one you should start building from your very first paycheck. If you haven’t, it is never too late to start.
You get significant tax breaks for saving for your retirement. But the money you put into these fund are restricted and you can’t touch them until you are old.
Does your company offer a pension or provident fund, where they offer to match your monthly contribution? In other words if you put in 3%, your company will also put 3%. If the answer is yes, then this is possibly the most important action you can take. You want to make sure that you are contributing the maximum amount possible. The money your company matches is like free money and who doesn’t want free money right?
Ok what should you do if your company does not offer anything, then you need to open up a retirement fund.
Create a plan
So how much should you save for retirement?
“As much as you can” is the standard advice. Many financial planners recommend that you save 10% to 15% of your income for retirement, starting in your 20s.
But that’s a general guideline. This is your retirement we’re talking about. So it pays to get a little more specific by doing your homework up front. It’s a good idea to establish a savings target – one that tells you roughly how much you should set aside over time to meet your retirement goals.
Most retirement calculators’ work on something called a retirement replacement ratio. Which means what percentage of your current income would you withdraw after retirement? For example if you are currently earning R15,000 a month and after retirement you can draw R9,600 a month from your savings, that is a 80% replacement ratio.
It’s important to consider how your expenses will change in retirement. Some, like health care and travel, are likely to increase.
You will want to build your retirement savings based on the goals that you have. Have a look at your current monthly expenses; think about what they are likely to be when you retire. For instance your medical aid is likely to be higher. , Your entertainment is likely to be lower (unless you are like me and plan to dance until you are 96 in the shade). Use a retirement calculator to work out how much you will need to save every month, in order to get the income you want when you retire.
The sooner you start on this saving the better it will be for you in the long run. I recommend speaking to a financial adviser about this.
Healthcare is constantly improving which means people are living much longer than they used to. So if you retire at 65, you could live to 90 or longer so you looking at 25 or more years that you need to plan for, Scary right? This means that building up as much wealth as we can while we working is pretty critical.
What if I can’t save enough?
Try to divert as much of your earnings into savings as you can. If you don’t have a budget, create one. If you do have a budget, revise it to reflect your newly urgent commitment to saving. Chip away at wasteful habits. That might mean ditching expensive dinners or unused gym memberships.
If you’re still young and you can’t save enough right now, don’t be discouraged. Your income will probably grow as you progress in your career, allowing you to save more. You might also have other opportunities to boost your savings rate. For example, a bonus or inheritance can make a big difference in your long-term prospects if you invest some of the money in retirement accounts.
It’s never too late to save for retirement
We’re living a lot longer. Ninety used to be an impossible age, but nowadays a couple aged 60 can expect at least one of them (likely the woman) to live to that age.
So, some people retire in their 40s while others are starting second careers in their 60s. This throws traditional retirement ideas out the window.
People used to work their last day at 65 and then start drawing a pension – the latter structured as low risk to last as long as you do. Typically, that would be a decade or maybe a little longer.
Now we hit 65 and our retirement annuity (RA) kicks in, buying us an annuity. But if we’ve done it right, this will be far from our only income.
May be you are 50 years old and that there was no point in opening a tax-free account as it would take some 15 years to get to the R500 000 lifetime contribution limit. But that’s surely fine? Heck, open a tax-free account regardless of age. Any tax-free return is better than none.
At 50, one could still build savings by 65, ensuring retirement with plenty of time to enjoy a financially independent retirement. It’s likely true that earnings and savings potentially peak in your 50s, especially if you have kids who’ve left home.
The best time to have planted a tree is 20 years ago. But if you didn’t, then plant it today. In 20 years, you’ll enjoy the shade. Even if you think you’re too old to enjoy the shade, it still shouldn’t stop one from planting the tree for future generations.
We need to throw out outdated views of what’s old and how we retire and recognise the new rules that apply. Importantly, those rules show us there’s plenty of time to build wealth and financial independence.
You know you deserve more, right?Sometimes, you just need help to reach it.
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