A Fin24 user thinks most people will not be able to work for 40 years to save for retirement. He writes:
I have been reading a lot about saving for a pension. Mostly, the advice is that you need to save 15% of your salary for 40 years to be able to retire comfortably.
To me it seems like most of the working people will not be able to save for that long.
For example, in the mining industry, one is forced to go on pension when he or she is 60 years old.
I am sure that 99% of people working in mining did not start working when they were 20 years old.
I assume most people will only be able to work for around 30 years and not 40 years.
Is there any rule of thumb that can be devised for saving for pensions for 25 years to 30 years?
Mind you, the majority of youth will start working when they are approaching 30 years.
How about saving 25% of one's salary for 30 years instead of 15 % for 40 years?
Dr Chris van Wyk of PSG Hermanus Portfolio Management & Stockbroking responds:
There is no simple rule of thumb to arrive at a reliable savings or investment commitment to ensure adequate retirement provision.
Every individual’s unique situation has to be borne in mind. Hence, the only reliable approach is to embark on proper financial retirement planning.
In a broad outline, the following process should be helpful in determining the ongoing saving or investment required to achieve one's retirement objectives.
Lifestyle at retirement
Clarify your preferred lifestyle at retirement. Same as today, better or more prudent? Express this as a rand value having taken note of assumed inflation until retirement.
Increases required
Determine the periodic percentage pension increases you would require to ensure continuation of your preferred lifestyle during retirement.
Risk profile
Establish your risk profile or risk tolerance. That is your perceived capability to handle risk, both financially and psychologically.
There are appropriate techniques available to do so.
Long-term return
Develop an assumption about what long-term return could reasonably be expected from an investment portfolio which reflects your risk profile.
Starting capital
Assess how much starting capital you already have for investment towards retirement provision.
Retirement age
Determine your preferred retirement age, which gives you the number of years available to build your retirement fund.
Investment required
You should now be in a position to estimate the monthly or quarterly or annual investment required to arrive at the desired investment portfolio to fund your retirement.
This is best done with the assistance of a financial adviser or investment consultant.
Budget
Assess whether your budget can cope. If not, revisit every step in the process.
There is no shortcut if one wants to assure a reasonable degree of financial peace of mind during retirement.
- Fin24
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