Re­tire­ment fund­ing: what’s your num­ber?

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We are con­stantly mea­sur­ing our wealth and our health. The num­ber of steps we take per day, our av­er­age heart rate per ex­er­cise ses­sion, our Smart Shop­per points, re­wards, eBucks, share port­fo­lios … You name it, we mea­sure it.

But how of­ten do we check whether we’re on track for one of the most im­por­tant events of our lives: re­tire­ment? And, more im­por­tantly, do we know what mea­sure to use?

The 2017 San­lam Bench­mark Sur­vey found that, among re­tire­ment fund mem­bers, the burn­ing ques­tions in the fi­nan­cial plan­ning process are:

• Ex­actly how much should I re­tire with?

• How much must I save ev­ery month or year if I want to re­tire com­fort­ably? Why are peo­ple so con­fused? Ac­cord­ing to the Bench­mark re­port, all the re­tire­ment funds sur­veyed have a tar­get pen­sion, ex­pressed as a net re­place­ment ra­tio (NRR), that trustees work to­wards achiev­ing.

A NRR is the per­cent­age of a mem­ber’s pre-re­tire­ment in­come that is paid out by a pen­sion plan at re­tire­ment, di­vided by his or her pre-re­tire­ment salary. It is a com­mon mea­sure­ment that can be used to de­ter­mine the ef­fec­tive­ness of your pen­sion plan.

But how ef­fec­tive is this mea­sure re­ally if 40% of the funds in­cluded in the sur­vey be­lieve that the NRR is not suit­able for de­ter­min­ing whether a mem­ber is on track for re­tire­ment? The main rea­sons for this re­sponse are that mem­bers do not un­der­stand the mea­sure, and too many vari­ables and as­sump­tions are used to cal­cu­late the ra­tio.

One of the big­gest ar­eas of con­cern is that most funds de­fine pre-re­tire­ment salary as “pen­sion­able re­mu­ner­a­tion”, which can be any per­cent­age and is nor­mally less than 100% of mem­bers’ to­tal re­mu­ner­a­tion.

It there­fore could be ar­gued that the NRR is not a suit­able mea­sure for de­ter­min­ing whether mem­bers are on track for re­tire­ment. So what should your num­ber be?

TRY THIS NUM­BER

One num­ber that is easy to un­der­stand is to ex­press your re­tire­ment sav­ings as a mul­ti­ple of your cur­rent salary at dif­fer­ent points in your work­ing life. The mul­ti­ple of your salary that you should have saved is based on the fol­low­ing as­sump­tions: • You re­tire at age 65; • You save 15% of your an­nual salary (in­clud­ing your an­nual bonus/13th cheque) each year;

• Your in­vest­ment earns a re­turn of 10% a year; Years worked 5 10 15 20 25 30 35 40 Age at which you start to save for re­tire­ment 25 35 45 50

• Your salary in­creases by 6.5% a year; and

• If you are mar­ried, both you and your spouse con­trib­ute to­wards re­tire­ment sav­ings.

Based on these as­sump­tions and that you should have saved 15 times your fi­nal salary by the time you re­tire, Ta­ble 1 (above) sets out some goal­posts on the road to re­tire­ment.

Cur­rently, for each R1 mil­lion that a 65-year-old mem­ber saves, a man will re­ceive a monthly pen­sion of about R6 000, while a woman (be­cause she is ex­pected to live longer) will re­ceive about R5 400, grow­ing with in­fla­tion ev­ery year. So, if you want to in­vest in an in­fla­tion- linked an­nu­ity at the age of 65, you will need to have saved 15 times your fi­nal salary by 65.

Ta­ble 2 sets out the per­cent­age of your salary that you should save if you start sav­ing at dif­fer­ent stages of your life.

As the ta­ble shows, if you haven’t started sav­ing at age 25, sav­ing 15% of your salary will Mul­ti­ple of cur­rent salary saved 1.2 2.3 3.7 5.3 7.2 9.4 12.0 15.0 Per­cent­age of salary that you must save 15% 24% 43% 60% not en­able you to achieve a mul­ti­ple of 15 times your fi­nal salary at re­tire­ment. Late starters have to save much more ev­ery month.

Which prod­ucts should you use to save for re­tire­ment?

You may con­sider a tra­di­tional pen­sion or prov­i­dent fund, and sup­ple­ment it with a re­tire­ment an­nu­ity, a tax-free sav­ings ac­count, re­tail gov­ern­ment bonds or an or­di­nary unit trust fund. This com­bi­na­tion will give you more flex­i­bil­ity in terms of in­vest­ment choice and the abil­ity to ac­cess your in­vest­ment.

BOOST YOUR SAV­INGS

There are other ways to boost your re­tire­ment sav­ings:

• The first golden rule is never to cash out your re­tire­ment sav­ings when chang­ing jobs. This re­mains the big­gest mis­take that mem­bers make.

• Do not be tempted to ac­cess your sav­ings to pay off debt, buy con­sum­ables or up­grade your life­style.

• At re­tire­ment, do not take the one-third cash lump sum, be­cause your long-term need for a higher monthly pen­sion is more im­por­tant than the lux­u­ries you can buy.

• Know ex­actly what per­cent­age of your monthly salary and an­nual bonus you need to save to reach your re­tire­ment goal, and set up a monthly debit or­der so that the money goes off your salary be­fore you are tempted to spend it.

• In­vest wisely and tax-ef­fi­ciently, and know ex­actly what you are pay­ing in fees.

• Ob­tain ad­vice from a fi­nan­cial ad­viser with the Cer­ti­fied Fi­nan­cial Plan­ner ac­cred­i­ta­tion.

• In­vest­ing for re­tire­ment is a long-term goal, so make sure you are suf­fi­ciently in­vested in ag­gres­sive as­sets (such as eq­ui­ties or listed prop­erty) so that you can earn in­flat­ing-beat­ing in­vest­ment re­turns of at least 10% a year af­ter fees.

• If you don’t have a goal, there is noth­ing to aim for. Make sure you know what your “fi­nal num­ber” is, and make ev­ery ef­fort to stick to the plan.

These rules of thumb may not ac­count for every­one’s per­sonal cir­cum­stances. A sud­den spike in your salary may mess up your mul­ti­ples for a year or two, but be sure to have your re­tire­mentsav­ing goals in place. Al­lo­cate any ex­tra cash to your re­tire­ment sav­ings and not to en­hanc­ing your life­style.

A dis­ci­plined ap­proach to sav­ing for re­tire­ment is the best gift you can give your­self in your “golden years”. Karen Wentzel is the head of an­nu­ities at San­lam Em­ployee Ben­e­fits.

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