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How much will you need for retirement? Everyone would love to know the answer. Humans, after all, find comfort in certainty. This is why we read the latest investment news and calculate down to the last penny, it’s an attempt to crack the code.

We shy away from ambiguity and are driven to do whatever it takes to find answers. Studies have concluded that our choices are influenced by our hunger for answers.

The answers to well researched questions refer to generalizations and averages, but it is of the utmost importance that you consider your personal goals and needs when you formulate a financial plan. It may be worthwhile consulting an independent financial advisor to evaluate your situation and provide some tailored advice.

How much should you save?

It’s widely believed that an income of 75% of your salary allows you to retire comfortably. This accounts for any adjustments you need to make as you age (i.e. increases medical costs). Here are a few factors to consider when evaluating your potential needs.

  • Housing

Will your mortgage be paid off by the time you retire? If the answer is yes, then remove the home payments line from your budget. You will need to increase your housing budget if you’re thinking about renting or buying a larger house or apartment in the future.

  • Transport

Do you plan on buying any new vehicles or will you pay off your current vehicle? Will you need to make vehicle payments during your retirement?

  • Medical Expenses

Your medical aid contributions, medication and doctor’s visits all tend to increase as you get older. Medical inflation is typically above the average inflation and is currently 3% higher.

  • Education

Do you have dependents and will you have to pay for their tuition during retirement? The inflation associated with education is also above the average inflation and is approximately 4% higher.

Start saving as early as possible

Research shows that saving 17% of your salary is a sensible starting point for the young saver (from the age of 25). This percentage increases drastically the longer you wait. At age 30 you will need 22%, 42% at age 40 and 59% at age 45. Keep in mind that these are only averages and they are calculated making a number of assumptions, namely: a salary with an annual inflationary increase, a retirement age of 65 and average returns of consumer price inflation (CPI) plus 5%.

Lifestyle inflation

Your personal inflation rate measures your lifestyle improvement rate. If it is higher than the CPI then these guidelines will not work. Above inflation salary increases and spikes may allow you to improve your lifestyle (like purchasing a new house), but could set back your retirement provision. Funding this new lifestyle during retirement requires you to increase your savings rate or postpone retirement. Getting used to a new lifestyle implies the need to fund it during retirement.

Meeting your goals

Are you on track to achieve your goals? This simple test will help you get a better idea. Answer these two questions and consult the table:

  • What’s your current salary?
  • How much have you currently saved for your retirement?
Number of years worked Multiples of your annual salary
10 years 2x
20 years 5x
30 years 10x
40 years 17x