Retirement: Save 20% of your salary

Johannesburg - There is a belief that if you save 10% of your salary each month, either directly or through a company pension plan, you will be able to retire. This is in fact very wide off the mark, with ordinary South Africans needing to save at least 20% of their money salary to ensure a quality retirement.
 
Many South Africans’ retirement savings are in fact hopelessly inadequately, said Rian le Roux, chief economist at Old Mutual Investment Group South Africa (Omigsa).
 
To illustrate this point, Le Roux uses an admittedly unrealistic example of an environment of zero inflation, zero interest rates and zero investment returns.
 
"Say you want to retire after 35 years of work (at age 60) on 75% of your salary, and it must last 25 years (until you die at 85).  How much of your income must you save over 35 years to be able to live on 75% of that income for a further 25 years?  The answer is 54%."
 
He adds that if you only work 30 years and need 75% of income for a further 30 years (you die at 85), the percentage you need to save goes up to 75%.
 
"In this simplified world, it means that if you save say 20% of your monthly income over 35 years, you will only have 28% of the income during your working years as a pension.  In the second example, the percentage goes down to 20%," Le Roux said.
 
Put differently, unless you get pretty high returns on your investments during your working life, you will have to save a hefty percentage of your income to retire comfortably.  In a normal world of inflation and positive investment returns, the focus must be on getting high real returns on your investments. 
 
Warren Ingram from Galileo Capital concurred, saying that if you were depending on the 10% savings rule you would end up well short, particularly if that 10% was simply through a defensive pension fund with your company. You need to put away nearer to 20% per month, he said.
 
Old Mutual recently launched its Savings Monitor for South Africa, which showed that half of South African households are saving less this year.

About 19% of households are saving for a deposit to buy a house, 31% are saving for their children's and their own education, while 15% are saving to pay off debt. The data also showed that about 22% of households are saving to buy a car.

For Generation Y (people born after 1980) saving is a low priority, with the majority saying that they need debt to fuel their material lifestyle

Only 7% of South Africans are saving to start their own business, the survey shows.
 
The last point is an interesting one as Absa Wealth acting CEO Carl Roothman pointed out to Fin24.com that many of its high net worth individuals had made a great deal of money through starting and selling their own businesses.
 
However, investing in your own business then means that you may not have sufficient extra cash on hand in the early years to make more traditional investments in retirement and savings vehicles.
 
Le Roux concluded: "Understand the risk of your business and do not fully rely on the business as a nest egg. That’s the same as putting all your eggs in one basket - typically a stupid idea."
 
- Fin24.com