Most people who are able to save don’t save enough because they don’t realise how much they are going to need for retirement, Rian le Roux, the chief economist at Old Mutual Investment Group said at the launch of the Old Mutual Savings & Investment Monitor this week.
So how much is enough?
If you retired today at the age of 65 and you had R1 million in retirement savings, you could buy an inflation-linked annuity (pension) of only R4 300 a month if you were a woman, or R5 100 a month if you were a man.
The first question you are likely to ask when you are told that you need to save for retirement is “How much?”, and the Actuarial Society of South Africa has published some benchmarks against which you can measure your savings goals.
Niel Fourie, the public policy actuary at the Actuarial Society, has calculated what type of monthly income you could expect if you had R1 million, R5 million or R10 million to buy an inflation-linked guaranteed annuity. He also calculated how much you would have to save over 40 years to accumulate those amounts.
With a guaranteed annuity, a life assurance company pays you an income for as long as you live. If your annuity is inflation-linked, your income will increase every year in line with the inflation rate. Initially, your pension will be lower than a level annuity, which remains the same throughout your retirement.
Fourie says a 65-year-old man who retires today could buy an inflation-linked guaranteed annuity of R5 176 a month with R1 million; R5 million would buy a monthly pension of R25 980; and R10 million would buy a pension of R51 986.
Women, on average, have a longer life expectancy than men, so a woman will receive a lower pension for the same amount of capital, Fourie says. An amount of R1 million would buy a 65-year-old woman a pension of R4 392 a month; R5 million would buy a pension of R22 059 a month; and R10 million would buy a pension of R44 142 a month.
The monthly pensions are before tax. In the 2015/16 tax year, people over 65 have to earn a taxable income of more than R9 567 a month (or R114 800 a year) before they pay tax. In addition, they are entitled to the primary and secondary rebates of R13 257 and R7 407 respectively.
Fourie also calculated how much money you would have to put away over 40 years to save R1 million, R5 million or R10 million. His calculation is based on the assumptions that each year,you increase your monthly contribution in line with an annual salary increase of seven percent; the inflation rate is six percent a year; and you earn a net return of 10 percent a year.
Fourie says that, to have accumulated R1 million today, over 40 years, you would have had to put away R800 a month to start with (increasing at seven percent a year), R4 000 a month for R5 million and R8 000 for R10 million.
Pensioners who realise that they have not accumulated enough money to buy a guaranteed annuity that will be able to meet their monthly income requirements often opt for a living annuity, because it enables them to draw a higher monthly income, he says.
“Unfortunately, this will rapidly erode an already low capital base, and the money will eventually run out completely,” Fourie says.
With living annuities, also called investment-linked living annuities, you choose the investments – usually unit trust funds – and carry the risk that your investments fail to generate sufficient income to last throughout your retirement, which could be as long as 30 years.
With a living annuity, neither your income nor the preservation of your capital is guaranteed.
Fourie says that if you opt for a living annuity, to sustain your income you should not withdraw more than five percent of your capital a year. This means that, if you need R25 000 a month (or R300 000 a year) from your annuity, you will need a lump sum of at least R6 million, he says.