How do you know when you’ve saved enough to be able to retire?
There are many different factors to take into account, including the unpredictable rate of inflation. Your safest bet always is to consult a professional, who will take your individual circumstances and needs into consideration. But the general rule of thumb is that if you can live on 6% of your retirement investment capital, and your savings are properly managed, you should be able to retire comfortably.
According to an article published in Fin24 in 2017, after you retire you should be able to manage on about 20% less per month. This assumes that you’ll spend less on transport and business attire. Your home may also be paid off, or you may downsize. Please note that this theory does not allow for the possibility of deteriorating health, or the need for specialised care in later life.
So, if you’re living on R20 000 per month now, you should be able to manage on R16 000 when you retire. But in order to be able to keep drawing off R16 000 for as long as you live, you need to have sufficient capital to generate this amount in interest.
The article quotes the historical return on the South African stock market (since 1964) as about 8% higher than the local inflation rate, which means that a safe withdrawal rate is estimated to be about 6%.
Based on a 6% annual withdrawal rate after retirement, the amount you will need to have saved looks something like this:
R16 000 x 12 months = R192 000 (annual living income) ÷ 0.06 (6% safe withdrawal rate) = R3 200 000.
So you’ll need R3.2 million if you plan to retire now. If you plan to retire in 10 years’ time, you’ll need more. Because, inflation will dramatically affect the cost of living. Working on an annual inflation rate of 6%, the R3.2 million savings you need today will have increased to around R5.7 by 2029.
At the moment, only about 6% of South Africans can afford to retire independently. If you are not already saving for your retirement by contributing to a retirement annuity or pension fund, you need to start right now. If you leave it too late to begin saving, it is virtually impossible to accumulate sufficient savings to fund your retirement.