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Ok. Got itMike Wilmot, Head of Investments at Nedbank Private Wealth, helps us navigate this question as it relates to money in general, and specifically, saving for retirement.
The short answer is that it depends
Wealth and satisfaction isn’t linear. How much is enough is about much more than just an amount of money. To answer this question in a meaningful way for yourself, requires you to think long and hard about your aspirations, priorities, and personal circumstances – and then focus on what the financial implications of these may be, both now and in future.
Your values, priorities and circumstances are linked to your financial wellbeing
Money is important. It is crucial for basic requirements and it provides optionality for other outcomes like better education and travel. It is however one element in the overall chemistry of leading a fulfilled life. Before you get to the financial side of things, you first need to answer the question: what makes you tick and what gives you the most satisfaction in life? Only once you’ve answered this question should you arrange your efforts, finances and wealth planning around this.
Where to begin when it comes to the actual numbers – saving and replacing
There are any number of spreadsheets and rules of thumb that can help you answer the question how much is enough to retire from a purely financial point of view.
A reasonable, continuous savings target during the accumulation phase should be at least 15% of your income for 35 years, invested in a sensible portfolio of assets over time. This should give you a decent chance of achieving the next objective – an adequate income replacement in retirement. One of the most commonly used and well-known rules of thumb is to focus on what is known as a replacement ratio (the ratio that calculates the amount of income you will have after retirement as a percentage of your final working salary). This approach is based on the simple premise that you need to save enough to be able to earn a reasonable replacement income from your savings after you stop working.
How much do you need to accumulate before retirement?
The table below shows at what age you will be able to comfortably retire, assuming you need 75% of your final salary to live the way you want, and prudently assuming below-average market returns. Using our recommended base case of saving at least 15 times your final salary as an example, if you are an average male with a life expectancy of 80, you could retire at age 61. A more ambitious but recommended target is to have 20 times your final salary saved, in which case retirement is possible at age 56 for the average male. In this scenario, those that retire around 60 and live to be 90 should also have sufficient savings. Given that statistically women outlive men and that life expectancy overall is increasing, we advocate the more ambitious (20 times your final salary) target. As the table shows, the more you save (and by implication the less you spend) and the earlier your start saving, the more financial and work independence you gain in your later years.
Retirement age | |||
Wealth multiple saved by age 55 | Life expectancy of 80 years | Life expectancy of 90 years | Life expectancy of 100 years |
5x annual salary | 72 | 77 | 81 |
10x annual salary | 67 | 72 | 75 |
15x annual salary | 61 | 67 | 70 |
20x annual salary | 56 | 61 | 65 |
Source: Daniel R Wessels, When should I retire? 2012 | |||
2011 |
2012 |
2013 |
2014 |
2015 |
6.99% |
6.77% |
6.63% |
6.59% |
6.44% |
* The average income drawdown level is weighted by fund size. | ||||
Source: ASISA |
Assumptions can make any ‘rule of thumb’ dangerous if you don’t have access to the necessary expertise to tailor your plans with the help of a financial advisor:
Some people plan to receive an inheritance to supplement their nest-egg, and many also assume that property and other assets will grow in a straight line and be easy to sell at their market value when needed.
Ways to improve your outcome
What will give you the best chance of achieving your definition of enough?
Money is complex and impacts all areas of our lives. Invest in yourself. Save more, for longer. Spend better. Get professional advice. Start with defining your life objectives, and then organise your activities and money management around these.