It is widely held that a retirement income equal to 75% of your final salary will allow you to live comfortably during this phase of life. So just how much should you be saving towards retirement?
(Seventy-five percent accounts for the adjustments many people make as they age, for example, lower housing and higher medical costs.)
"Government’s previous maximum tax-break of 15% has been used as a benchmark for retirement saving. In other words, many investors believed that putting 15% of their salaries into retirement savings every month would result in a comfortable retirement income," explains Wanita Isaacs, investor education manager at Allan Gray.
15% is not enough for a sustainable retirement
Isaacs says that the new tax break of 27.5%, which came into force on 1 March 2016, is a much better benchmark, but some investors may still be uncertain as to how much of their salary they should be investing every month.
Assuming that you will be comfortable living off 75% of your pre-retirement salary, the first column in the table shows the percentage of the current salary that investors at different ages would need to invest when starting to save for retirement for the first time.
"The table shows that even for a 25-year-old, investing 15% of taxable income is not enough to ensure a sustainable and comfortable retirement. A much safer rule of thumb is to invest at least 17%," says Isaacs.
For those investors who started saving for retirement early and have been resting in the false security of investing the previous "maximum" of 15% of their salaries, the second column shows the level to which they would need to increase their percentage of salary in order to catch up.
"However, it is still important to look at your personal needs to assess how much you should save," she explains.
Account for personal circumstances
The numbers used in the table are simply averages and assume a consistent, inflationary salary increase each year.
"This won’t work for you if your personal inflation rate, the rate at which your lifestyle improves, is higher than the general inflation rate," says Isaacs.
She cautions that a spike in salary affords you lifestyle improvements such as a bigger house, but these may set you back in your provision for retirement.
"Instead of continuing to invest at the same percentage of your new salary, you will need to ramp up your savings rate if you want your retirement income to fund your lifestyle at retirement."
Isaacs' top tips to increase your retirement savings pot
1. Prioritise your retirement savings when you get additional income. You can do this either by splitting each individual income boost or alternating between improving your current lifestyle and increasing your retirement savings.
2. Delay retirement to give your investment more time to grow, both through your contributions and return on your investment.
3. Decrease your income needs in retirement by re-thinking your lifestyle priorities.
4. Supplement your retirement savings. For example, in addition to your retirement fund, you could consider saving in a tax-free investment account or a unit trust, which gives you more flexibility and easier access to your investment.
5. Consider the advice of an independent financial adviser if you are uncertain how much you should be saving.