Watch: How to save for your retirement

Retirement.

Some people think they are too young to worry. Or should never worry. Others are worrying because they haven’t started.

Acknowledging you need to save and getting started gives you choices. The best choices come from starting young, even if you only have small amounts to save.

If you start young, you can save less because compound interest will do more work for you.

Successful savings formulas

When you are employed and save in a retirement fund set up by your employer, the level of your contributions is set to target a retirement income, assuming you save throughout your working life.

There are three key numbers:

1. The amount you contribute – typically 12 to 15% of your income - split between you and your employer;
   
   
2. The time for which you will contribute - typically 40 years;
   
   
3. The return you will earn – typically 5 or 6% above inflation.

These three numbers are used to target an income in retirement that is between 60% and 75% of your salary when you retire.

If you are self-employed, you can use a similar formula – or get an adviser to help you.

Contributions + interest x years to retirement = Retirement income as percentage of your pre-retirement earnings

15% of salary + return (eg inflation + 5%) x 30 years =  75% of income at retirement

Income target

The retirement income target is lower than your earnings at retirement because as a retiree you should be:

• Debt free;
• Child free;
• No longer saving for retirement;
• No longer travelling to work; and
• Paying less tax.
  
  

Check your numbers

Remember the formula is a general one – you are unique, so check your numbers.

You could be off target if you:

• Started saving later in your working life;
• Have withdrawn from your retirement savings;
• Haven’t been saving enough; or
• Have had a big increase in your earnings.

To fix that, you may need to:

• Contribute more, or
• Contribute for longer

to catch up on both the contributions and the compounding growth on them.

Check your retirement income

One way to test if your retirement savings plan is on track, is to test what income your savings can provide.

All retirement fund statements show you how much you have saved to date.

Some project how much you will save by retirement if you carry on contributing at your current level.

They may also give an indication of the income or pension those projected savings are likely to provide.

The projected retirement income should be in today’s rands – without future inflation - so you can compare it to what you are earning today.

You can also check your savings plan using our retirement calculator.  

Remember: retirement income projections are based on assumptions about:

• The returns you will earn in future;
• How you will use your savings to provide an income – whether you will buy a guaranteed pension for life or use investments in a living annuity.
• How long you will live in retirement.

Stress-testing the income you can expect in retirement, allows you to tweak your savings plan. You can consider:

• Saving more before retirement;
• Working for longer;
• A lower income in retirement; or
• Taking a little more investment risk to earn a higher return. …

Never forget, however, the longer your savings are invested, the more work compounding will do for you. Keep that in mind when you think about delaying your savings. Or raiding your savings pot.