Is there a simple calculation that I can do to see roughly if I’m on track with my retirement savings?
This is such a simple question, but unfortunately it doesn’t have a simple answer. There are a number of variables that need to be taken into account. These could include:
- What your idea of retirement is: Some people feel that they will need more income when they are retired than when they are working, while others feel they could manage with just half. Whether you are on track to reach your goal depends on what your goal is.
- What type of annuity you plan to purchase: At retirement you basically have two options. You can either use your retirement saving to buy a life annuity or a living annuity. There are many advantages and disadvantages to both, but in general to use a living annuity safely you will need to have saved more than when choosing a life annuity.
- How long you will be in retirement for: We know that in general people are living longer today than they ever have in the past. Of course, knowing that people live to age 80 on average doesn’t really do you much good, because you could live to 120 or die at 40 – there is just no way of knowing. In general, the longer you expect to live, the more you would need to have saved.
- A number of other assumptions: To do the calculation we also need to have assumptions for variables such as inflation, investment returns, annuity rates, safe drawdown rates and many more.
So it is a difficult question to answer because the answer will be very specific to each person. But you probably knew that which is why you asked this question, right? To help you get a general idea I have put together the tables below. Read them as follows:
The replacement ratio is your income in retirement as a percentage as your income before retirement. So if you were earning R10 000 per month before retirement and you have a replacement ratio of 100 percent you would get R10 000 per month after retirement. A replacement ratio of 80 percent means you will get an income of R8000 per month. Each table is for a different level of savings towards your retirement goal. The number in the table is the multiple of salary that you need to have saved at each point in time.
Let’s look at an example
John is 35 years old and wants to retire at age 65 which means he has 30 years left before retiring. He saves five percent of his salary towards retirement. Using the "saving five percent of salary" table and looking at the row with 30 years until retirement he can see that to have a replacement ratio of 100 percent he would need to have saved 5.3 times his annual salary. If John earns R120 000 per year this means he would need to have saved R120 000 x 5.3 = R636 000. If he has only saved about 2.8 times his annual salary (R120 000 x 2.8 = R336 000) he is likely heading for a replacement ratio of about 60 percent.
I hope you can use these tables to get a broad idea of whether you are on track or not.
Article continues on page two and three: tables you may use to get an idea of whether or not your retirement savings are on track and what to do if you're behind...