This article by Patrick Cairns, published on MoneyWeb, may shock you.
When it comes to saving for retirement, the majority of us underestimate how much we will actually need … or we leave it too late to start, and then cannot accumulate sufficient wealth.
For example, if you currently earn R30 000 per month, and you want to continue enjoying the same level of income after you retire, you need to have built up R9 million capital in order to match your current salary.
Even this is an educated guess. It is impossible to know exactly how much you will need, because there are three variables in play that nobody can predict: how long you will live, what inflation will be in the future, and what return you will earn on your investments.
Most financial planning works on the assumption that you will not need the same monthly income after you retire as you are earning when you are still working. In South Africa, generally it is assumed that you will need to replace 75% of your income.
Certain expenses may be lower, but you still have fixed costs like water, electricity and medical aid that don’t get any cheaper just because you aren’t working any more. A 75% replacement ratio might work for much larger salaries where these fixed costs make up a lower percentage of the whole, but it’s a lot more difficult lower down the scale.
A number of financial planners are rather proposing that we should be working on at least a 90% replacement ratio. If we can achieve that, we can assume that we will be in a good position to maintain our standard of living into retirement.