Cape Town – Are you on track with your retirement planning?
There’s a super easy way you can find out if you will be able to maintain the lifestyle you want once you leave the workplace behind. Sanlam Employee Benefits (SEB) has put together the following calculation:
• After working for 5 years, you need to have saved 1 x your annual salary
• After 10 years, 2 x annual salary
• After 15 years, 3 x annual salary
• After 20 years, 4 x annual salary
• After 25 years, 6 x annual salary
• After 30 years, 7 x annual salary
• After 35 years, 10 x annual salary
• After 40 years, 12 x annual salary
Dawie de Villiers, CEO of SEB, says the beauty of the calculation is that you don’t need sophisticated maths or financial knowledge to use it.
“All you need is an updated retirement savings lump sum and your annual salary figure – the calculation couldn’t be simpler.”
Figures are based on what is saved through traditional retirement vehicles (retirement annuities and work pension funds) and does not include other investments such as homes, De Villiers points out.
The ideal of course is to use the calculation throughout your working life, starting from your very first year of employment. But even for late starters, it is still a useful tool and will give a clear indication if you need to take urgent action.
De Villiers provides some useful saving guidelines:
Working for 0 to five years
How you start is a good indicator of how you’ll end up, so start saving for retirement from your very first salary.
Saving easily becomes a habit and it is always harder to replace bad habits than good ones. If you are wondering where to start, it is always good to consult a trusted financial adviser who will give you independent and unbiased choices.
And be sure to take your work pension fund very seriously, cautions De Villiers.
At five years
After five years of retirement saving your interest starts compounding, in other words earning interest on interest. Not for nothing did Albert Einstein call compounding the eighth wonder of the world, says De Villiers.
And if you change jobs, don’t just take the retirement money and run – it’s the single biggest mistake people can make when it comes to retirement planning, says De Villiers.
Instead, hold on to those savings in a preservation fund, so that the money can keep on working for you by compounding further.
At 20 years
You have reached the halfway mark of your formal working years and it is well worth taking a very deep look at both your retirement savings and your full financial picture to ensure you are on track for a prosperous, happy retirement.
At 30 to 35 years
Now is the time to review how your retirement savings are invested, and to start thinking about what type of annuity you would like to purchase when you stop working, says De Villiers.
Aligning your pre-retirement savings with your intended annuity choice will reduce the impact of market movements or changes in long-term interest rates on your retirement income.
At 40 years
Most of us will be thinking of retirement around now. Your next very important financial decision is how and where to reinvest your retirement savings so that you are able to maintain your lifestyle, says De Villiers.
Many funds offer a default annuity option; that is, a trustee-approved and institutionally priced solution suitable for most people.
You could also bring in your own financial adviser to consider the wide range of annuity options in the retail market, says De Villiers.
If you choose to go this route, speak to your adviser in good time. And don’t be afraid to challenge them to make sure they have really shopped around without bias for the product which suits you best.