Written by: Francois Strydom
One of the questions I get asked most often when speaking to clients about retirement is, “How much do I actually need to retire?” It sounds like it should have a straightforward answer. People often have a number in their head, whether that is R5 million, R10 million or R20 million, and want to know whether it will be enough.
The problem is that there isn't one number that applies to everyone. Retirement planning is less about reaching a specific amount and more about making sure your money can support the lifestyle you want for as long as you need it to.
Two people can retire at the same age with exactly the same amount invested and have completely different financial situations. One may have a paid-off house and relatively modest expenses, while another may still have a bond, want to travel regularly or provide financial support to their children. Their retirement requirements will be very different.
This is why I believe retirement planning should start with the lifestyle you want, rather than simply choosing a target amount of capital.
Inflation changes the equation
One of the things that can be difficult to appreciate when planning for retirement is the effect of inflation over a long period.
If you need R40,000 a month to maintain your lifestyle today and inflation averages 5% a year, you would need roughly R65,000 a month in 10 years to buy the same things. In 20 years, that figure would be more than R100,000 a month.
This is particularly important if you are still 10, 15 or 20 years away from retirement. The amount you think you will need today may look very different by the time you actually retire.
Your investments therefore need to have a reasonable opportunity to grow ahead of inflation, while still taking into account your time horizon and tolerance for investment risk.
Retirement could last a long time
Another factor that is often underestimated is how long retirement might actually last.
If you retire at 65, you could potentially spend 25 or 30 years in retirement. Your accumulated capital may therefore need to provide an income for decades.
This means retirement planning is about more than simply calculating how much you have saved. You need to consider your required income, other sources of income, how your investments are structured and how much you can sustainably withdraw.
Nobody knows exactly what investment markets or inflation will look like 20 years from now. A good retirement plan isn't about predicting the future perfectly. It is about making sensible assumptions, understanding the risks and reviewing the plan as your circumstances change.
So what is your retirement number?
Ultimately, your retirement number depends on your own circumstances. Your desired income, retirement age, existing investments, contributions, other income and expected investment returns all play a role.
The important thing is knowing whether you're currently heading in the right direction.
If you discover a shortfall while you still have 10 or 20 years before retirement, you have options. You may be able to increase your contributions, adjust your investment strategy or reconsider your retirement timeline.
Finding the same shortfall a few months before retirement is a very different situation.
So perhaps the more useful question isn't, “How much money do I need to retire?” but rather, “If I continue doing exactly what I'm doing today, will I be able to afford the retirement I want?”
If you'd like to find out, feel free to get in touch with me. We can arrange a meeting to go through your current investments, contributions, retirement goals and expected income, and identify whether there are any gaps that need attention.
Sometimes the most valuable thing you can do is simply find out where you stand.
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