If you’re a Millennial (born between the early 1980s and the early 2000s) starting to save for retirement, you must understand what the challenge is and what steps need to be taken.
Assume you are 25 years old and want to retire at 65 in 2057. The variable would be your desired income at retirement. If, for example, it is R24 000 a month in today’s money, you will need capital of R6 million at current values (assuming a drawdown rate of 4.8 percent). Based on Consumer Price Index inflation of six percent, this translates into a frightening R61 million in 2056. In this scenario, assuming a relatively aggressive annual return of CPI plus five percentage points, you would need to start investing R2 300 a month now, and increase the amount by 10 percent a year.
Of course, a higher income – and many would want more – would mean a higher monthly investment.
To appreciate the wisdom of starting young, consider the position of someone who is 35, rather than 25, and wants to retire at 65, which would be in 2047, also with a monthly income of R24 000. The capital required in today’s money remains R6 million, but the figure in 2047 money is much lower than for the 25-year-old – R35 million, as opposed to R61 million. However, the real issue is that the older individual, who has fewer years to build up the capital required, would need to put aside R4 800 a month in the first year, with an annual escalation of 10 percent.
These are basic scenarios. Smart individuals will take additional steps, such as developing a second income stream and making investments that yield higher returns. Some people will also benefit from windfalls, such as an inheritance.
It’s a sad truth that already the majority of South Africans do not have the financial resources to fund a secure and pleasant retirement.
I estimate that more than 89 percent of retirees are underfunded. In order to maintain their desired lifestyle, they deplete their capital, and thus effectively bank on dying before it runs out completely. That’s an extremely dangerous gamble, and increased longevity means the odds of getting it right are even more unlikely.
Millennials will probably have much longer working lives, but the inescapable truth is that it’s not too early to start saving now.
• Alex Cook is the chief executive of GCI Wealth, a national financial planning practice.