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How much you should save for retirement

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Massive tax incentives by Government make conventional retirement savings vehicles such as retirement annuities and pension funds a no-brainer. This discussion therefore focuses on how much you need to save through these vehicles. When full advantage of the tax deductible portion of your income has been taken, other investment options are encouraged but these will not be discussed here.

Your income in retirement may come from different sources but the majority will, in most cases, comprise of a pension income that you bought with retirement savings through a pension fund/s, provident fund/s and/or retirement annuity fund/s.

This pension will be a percentage of your final salary, called the income replacement ratio or IRR. For most people an IRR of 60 percent to 80 percent means that they will be able to maintain their standard of living in retirement as their debt burden is lower, children have left the home and there is no need for retirement saving. It is important to note that this may not be sufficient for everyone.

So how do we get to an IRR of between 60 percent and 80 percent?

By making a few relatively conservative assumptions, and using the annuity rates for males (women need a bit more as they typically live longer than men), the following give rough estimates of the portion of your income you need to invest in order for you to achieve an IRR of 60 percent:

  • If you have 40 years left to retirement you must save 15% of your income.

  • If you have 35 years left to retirement you must save 18% of your income.

  • If you have 30 years left to retirement, you must save 22% of your income.

  • If you have 25 years left to retirement, you must save 28% of your income.

  • If you have 20 years left to retirement, you must save 36% of your income.

The reader should also note that individual circumstances vary and these figures only give a loose indication of what is required. The above figures assume that the investor has zero capital saved for retirement.

Here are a few “retirement calculators” to play around with to help you zero in on what you need to save:

I suggest speaking to a financial planner about how to reach your retirement goals.


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