Comfortable retirement is elusive for many

The average replacement ratio for South Africa is understood to be just under 30% – well below the commonly accepted rate of 70%. Retirees with a replacement ratio of 30% can expect to receive only a quarter of their current income at retirement – which, needless to say, will have an adverse impact on their quality of life after retirement. The pandemic has also exacerbated this challenge as workers worldwide face financial setbacks, making saving for retirement less of a priority than before. 

Three levers to pull to achieve a retirement income that could suit your lifestyle

Saving for retirement boils down to three factors: time, contributions, and returns that beat inflation. If you’ve missed out on the bulk of your accumulation years, you’ll need to think of ways to maximise other options that are within your reach, such as assuming more risk by investing in more aggressive asset classes and/or committing to higher monthly contributions towards your retirement savings. The total return on your investment is another important component to consider. If your returns are consistently above inflation, and remain above the average (even after cost deductions), you’ll have more disposable income at retirement.

Incremental increases can have a substantial impact on returns

This is especially true when you integrate retirement savings with other tax-free investment vehicles. If you start later, your products will have to be more conservative to preserve your capital, which means returns are likely to be lower. By comparison, aggressive products, when started earlier, would likely earn better returns but would also be riskier. Finally, consider that by the time you retire and start to draw an income from your retirement product, you will probably not want to be invested in assets like equities (with their increased levels of volatility).

To test this theory, we looked at how much a typical investor would need to save at different ages

To reach a retirement lump sum of R2 791 615.43 and earn R20 000 p.m. from the age of 65, we assumed an annual growth rate of 6%. If you start saving at age 20, you would need to save R1 012.93 p.m. to reach this goal. Investors starting at ages 30 and 40 would need to save R1 959.43 and R4 028.34 respectively to reach the same goal. Investors over 50 years old would need a much higher monthly contribution of R9 599.16+ to make up for lost time.

But here’s the kicker – a 20-year-old with a contribution of  R1 012.93 p.m. would save R1 348 489 more than a 30-yearold with the same contribution; an investor starting at age 30 with a contribution of R1 959.43 would save R1 433 744 more than an investor starting at age 40 with the same contribution; and an investor starting at age 40 with a contribution of  R4 028.34 would save R1 620 098 more than an investor starting at age 50 with the same contribution.

We took it a step further and looked at how much each age group would need to generate in returns to reach the same goal if they kept their monthly contributions fixed at R1 012.92. A 20-year-old would only need to generate an annual return of 6%, compared to a 30-year-old or 40-year-old, who would need to generate annual returns of approximately 8.74% and 14.12% respectively. At age 50, you would have a tumultuous task of generating a return of 28.25% every year, which is highly unrealistic. In general, overly aggressive products usually generate between 8% and 10% in returns every year. So, it shows that if you start investing for retirement too late, the best way to make up for lost time is to contribute more. Starting later with a smaller amount will likely lead to a retirement savings shortfall.