We go to school until matric, some carry on studying further until their mid-twenties, work or start our own businesses afterwards and retire somewhere between 60 and 65 years old. Although life isn’t as bland or simple as this, eventually, everyone retires. 

Retirement can be an exciting and happy stage of one’s life. However, it’s important to be financially prepared for it as you’ll be earning nothing but still need to maintain your lifestyle. Research has continuously proven that we will live far longer than previous generations did which makes the retirement topic one which should be addressed as early as possible.  

Buying future income

You need to think of saving and investing for retirement as buying yourself future income. Once you retire, you should have accumulated enough capital (think savings and other accounts which you won’t touch) in your account from which you can withdraw monthly amounts from. This sounds very simple but what makes it so difficult is that we often don’t even plan for two weeks in advance, let alone 30 or 40 years’ in advance!  

Time is on your side   

If you are wanting to live comfortably and support yourself when you stop working, you need to start saving or investing as early as possible. This is because of the power of compound interest. 

The longer you save, the more your money will grow. Even if you can’t afford to put much away when you first start working, a little really does go a long way. If you put away R100 per month which attracts a 10% return per year over 40 years, you’ll end up with just over R600,000. Put away R1,000 per month and you’ll have about R6 million. 

You don’t have to earn a lot to retire comfortably! All it takes is to start as early as possible and save the right percentage of your income.

How much is the correct amount?

The answer depends on your personal circumstances, and how much you can afford. Things will usually be a little quieter during retirement. Debt has been paid off and the kids might have left home, but healthcare expenses will increase. Generally, you want to save enough so that you can retire with a monthly salary similar to the amount whcih you will earn in your final years of employment.

If you have Excel, we’ll take you through some simplified steps to gauge what the correct amount to invest/save for retirement would be for you.  

  1. On average, we can expect to live 20 years after retirement. Let’s assume that you’ll retire somewhere between the ages of 65 and 85. 
  2. Take what you expect to earn monthly at 65, when you retire, and multiply it by 75%. Your answer is the amount you’ll need per month in order to cover expenses and live comfortably during retirement. Remember that at the age of 65 you’ll be at the end of your career which means you’ll probably be earning your highest level of income between the ages 50-65. If you are between 50-65, your expected amount should be what you earn now multiplied by the 75%. If you are younger, find your dream job’s salary and add on 6% for inflation for every year you’ll be working towards this position. 
  3. Take this answer and multiply it by 240 (the number of months the average person lives for post – retirement)
  4. Head over to Excel and copy this equation into the formula bar “=PMT(10%/12;35*12;0;6000000)”.
  • 10%: the return you expect per year on your investment/savings. 
  • 35: the number of years until you retire (this assumes you are 30) 
  • R6 million: this is the amount calculated from step three. It represents the amount which you need at the start of retirement. 

The answer (which will be negative) is roughly the amount you should be putting away now, on a monthly basis, for retirement. You can adjust this formula as you please to better reflect your personal circumstances and what you expect the return on your investment to be.

Starting as early as possible and knowing the correct amount to invest/save for retirement is of utmost importance. That’s just the first step – sticking to the plan and not withdrawing early also requires discipline. 

Ross Reid

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Ross has joined the 22seven team as a Slice and Blog writer. He's a keen financial writer who enjoys demystifying the world of finance. Ross is currently pursuing the CFA designation and has a background in Real Estate finance and investment. In his spare time, he can usually be found reading, running or on the football field.
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