The government incentivises us to save for retirement in approved retirement funds by rewarding us with tax breaks. Historically the most you were allowed to deduct for income tax purposes was 15% of your income and although this has now been increased to 27,5%, which is a much better benchmark, many people still continue to save only 15% of their salaries or less towards their retirement fund.
How much income will I need in retirement?
When you retire, you generally need less income than during your working life. This is simply because some of your expenses like travelling to work fall away and children and education costs are a thing of the past. Depending on your retirement plans, you would typically need at least 60% and may be as much as 75% of your final pre-tax salary after retirement. Every few years it is important to take stock of your retirement savings to make sure you are on track with your plan to achieve 60%-70% of your final salary, rather than randomly saving thumb sucked percentages.
Pension Plan Disruptors
Even the best-laid plans, with the most disciplined savers, are not completely safe from disruptions. It is important to recognise that any interruptions or reductions in savings can have a dramatic impact on the number of assets we accumulate over a lifetime. We have to understand and address any hurdles that may get in the way of our savings or have already done so, in order for us to position ourselves to achieve long-term financial success.
Fewer Years in the Workplace
Have you ever taken time out of work to care for children or elderly relatives? Been retrenched and without employment for a while? Or maybe you have experienced a period of illness and been unable to work. Spending fewer years than the average in the workplace earning an income equates to fewer years of saving. Furthermore, working fewer years means less opportunity for potential salary growth, ultimately resulting in lower overall savings.
Lower wages lead to lost Compounding
Saving the same percentage but off a smaller Rand amount will leave big gaps in your pension plan. Maybe you have had several years earning a lower income or working part-time while caring for children or during a period of study. Saving less can diminish the benefits of compounding and lead to a much lower portfolio value over the long-term.
Living Longer and Greater Expenses in Retirement
With continuing advances in medical care, people are living longer and longer in retirement. While there are obvious benefits to living longer, it’s important to plan for the expenses that will come with these additional years. And often those later years are more expensive, as healthcare costs generally increase with age.
Rather Safe than Sorry
Even if you have been lucky enough not to face any of the savings challenges mentioned above but have been lulled into the false sense of security that investing 15% of salary will be enough for retirement, you should still do the numbers and make sure you have a viable retirement plan that will generate the income necessary for your desired retirement lifestyle. If you have experienced interruptions to your retirement savings or periods of no savings at all, you may need to urgently increase your savings and take advantage of compounding to give yourself the best possible chance of accumulating the assets you will need in the future.