How far do I still have to go before I can retire comfortably?
QI am 54, have R1m in a retirement annuity (RA), am still working and earn enough (R40,000 per month) to cover our monthly household expenses. The family home and our cars are paid off. My only debt is a credit card of R30,000. How far off am I financially to retire comfortably? The returns on the RA are 8%, it was a lump sum I invested, so not making any monthly contributions. I reckon I’ll need R20,000 a month to live comfortably. Your advice is really appreciated! Jenni C via WhatsApp
Janet Hugo, independent financial planner with Sterling Wealth, replies:
AMany people worry about their retirement and sadly do nothing about it. It is commendable that you’re facing the problem with enough time to make a difference. It can be emotionally empowering to face these realities and tackle the changes needed to secure a better retirement.
You do not say when you would like to retire, but let’s assume it is the usual retirement age of 65. That is just 11 years away. Assuming a moderate risk portfolio with an 8% a year return, your R1m investment should grow to R2.3m by the time you are 65.
You say you need only R20,000 a month to live on in retirement, which is 50% of your current income. Your salary of R40,000 a month will, at an assumed inflation rate of 5.5%, reach about R68,000 by the time you retire, which means you will need R34,000 a month as a pension to make up 50% of your income.
If you draw that amount from your investments in retirement, your investments will support this income for a mere six years. Ideally, you should plan for your pension to last 30 years in retirement as you could well live to age 95.
This plan assumes you pay off your debt before retirement and do not need any of your retirement savings to pay off your debt. Your credit card debt is likely costing you a good few hundred rand a month in interest. The sooner you pay it off, the sooner you will free up money that you can reroute to your retirement savings.
You should immediately start saving. Saving R1,000 a month alone can buy you another year in retirement at the income you need. It may not sound like much, but combined with other measures it could make a significant difference.
You should also consider investing a bit more aggressively since you still have more than 10 years to retirement. Assuming inflation is 5.5% and if you invest to target a return of inflation plus 5% — or 10.5% — and you contribute R1,000 a month, you could increase your savings at retirement to R3.3m.
This would provide the R34,000 a month you need for 10 years in retirement.
You could consider delaying your retirement age. If, for example, you delay retirement to age 68, save R1,000 a month until then and increase your targeted returns, you could have R4.5m by retirement, which would provide you with half your income — about R40,000 by age 68 — for another 12 years or until you’re age 80.
Depending on the interest rates at the time you decide to retire, it may be possible to increase your income slightly in retirement by taking a guaranteed annuity instead of investing in an investmentlinked living annuity, but this is likely to mean there will be no residual to leave to your heirs.
If it seems too difficult to find the money to save for retirement in your current budget, consider ways of enhancing your income.
You also mention cars — consider what you could save if you could give up one car.
YOU SHOULD ALSO CONSIDER INVESTING A BIT MORE AGGRESSIVELY SINCE YOU STILL HAVE MORE THAN 10 YEARS TO RETIREMENT