How Much Money Do I Need To Save Every Month To Retire On R20 000 pm?
At some point everyone reading this blog post would like to put their feet up and stop working altogether. The big question is how much do you need to have saved to be able to generate a comfortable income in your retirement? We’ve decided to dedicate this blog post to the notion that perhaps R20 000 per month (in today’s value) would be enough for you at age 65, to hang up the company access card lanyard for good.
Unless you are comfortable rocking a financial calculator, you will need to find an online retirement calculator to run your own scenario. The good news is that we’ve found a quick online calculator we will introduce you to later in the post.
Right now, let’s get to the questions you will need to answer to run your own retirement savings numbers:
How much income do you need at retirement, in today’s terms, before tax?
It sounds like a mouthful and can be a little tricky to understand. The idea is to think about what your retirement might look like and how much monthly income you will need to live on if it was today. Ideally you want to be debt free, so consider that when you come up with your retirement income figure.
For the purposes of this post we decided on R20 000 per month (in today’s terms)
How many years do you have left until retirement?
This is the next step in your calculation. Are you looking to retire at 50 or 65? Those fifteen years will make a massive difference in the time you have to save, and how far your money will need to stretch once you do retire. You probably can’t be 100% sure right now, but 50 might be too soon and 70 too late.
For the purpose of this post we decided on 35 years before retirement which would make the person doing the calculation 30 years old.
Expected inflation rate
Inflation is the silent killer that eats away at the value of our money. Nobody has a crystal ball and can look 35 years down the road. We’ve used the current Consumer Price Index (CPI) to give us an idea of what inflation is running at for our calculation, which is 4,5%. Then we rounded it off to 5% You can see historical SA CPI inflation figures here for your calculation.
The number of years your retirement income needs to last for
Remember that the earlier you retire, the longer your money needs to last into retirement. How long do you plan to live for is the question we are trying to get at. Everyone plans on living for as long as they can, but statistically the average South African man will live to age 61 and the average South African woman until age 67. You need to take those statistics with a pinch of salt and consider the socio-economic factors that contribute to those stats. Globally the life expectancy rates of a male are 70 and for a female, 74.
For the purposes of our calculation we factored on a retirement age of 65 and the income lasting until age 80 (15 years).
Your expected rate of return on your investment
What type of return can you expect on your investment? Again, this is a very difficult question to answer. Considering you have a variety of different types of asset classes (like cash and equities) to invest into, your answer could range from 3% – 20% per annum. The truth is that it is very difficult to try and time the market and most people would consider themselves better off working out what level of risk (appetite) they have, as well as the time frame they are looking at. The longer your time frame, the easier it is to ride out the inevitable ups and downs along the way.
For the purposes of this blog post we have decided on a 10% return.
Do you have any other income available to you at retirement?
Remember our calculation is trying to work out how much money you need to save to get to your target retirement income (in today’s values). If you have any other income besides your savings, that can be worked into the calculation, it’s at this step that you add those numbers.
In our calculation we inputted zero.
So how much money do you need to save to get to your desired income at retirement?
R2 434.11 per month is what you’d need to invest each month, with an inflation linked increase, in order to get to our desired retirement goal of R20 000 per month (in today’s values) in 35 years from now. We used a 30-year old in our hypothetical scenario.
Now that you understand the questions, why not check out how much you should be saving every month.
Until next time
The Moneyshop Team