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A Fin24 user is hoping to retire in about 15 years, but is not sure if she is saving enough to make this possible. She writes:
I am 49 years old. I am working for the department of health (DoH).
Hopefully, I will have about 15 years to build on my Government Employees Pension Fund (GEPF). However, I only started contributing in 2010.
How much will I have to save separately from GEPF in order to make sure that I have at least a fair retirement income? And where do I start?
Marius Fenwick, chief operating officer of Mazars Financial Services, responds:
In order to retire at a level of between 75% and 100% of your final salary, it is generally accepted that you need to save at least 20% of your salary for the duration of your working life, which is normally about 40+ years. This includes contributions towards retirement funds.
In other words, if the total contribution towards your retirement fund amounts to 10%, then a further 10% of your salary should be invested voluntarily.
There are many variables that will influence this; the most important will be the actual net returns achieved over the period of investment.
It is important to note that a 1% per year difference in net returns over the period will amount to over 20% difference in capital accumulated over the period.
This will determine your ultimate income level, and how comfortably you will be able to retire.
A major factor, and one commonly encountered, is where individuals were either unable to contribute the required amount for the full duration or where previous pension funding was spent when changing employment.
This will result in the base amount being reduced, so that a substantially higher amount needs to be invested on a regular basis to make up the shortfall.
In the case of this user, who has 15 years until retirement, the amount to be invested will depend entirely on current funds accumulated.
The impact of compound interest is profound. Let's look at this by way of an example:
Assuming you require R30 000 per month to retire at today's value, a capital amount of about R7.2m will be required today.
If the same amount is required in 15 years, the inflation impact at 7% per year will mean that R19.8m will be required in 15 years.
If we assume an investment return of 14% per year, the following will apply:
Scenario 1
Let's say the client has accumulated R1m to date. Then a total (pension and voluntary) monthly contribution of R12 630 per month without escalation will be required for the next 15 years, or R8 850 per month escalating at 7% per year to achieve his goal.
Scenario 2
If no capital has been accumulated to date, then a total monthly contribution of R35 000 will be required without escalation for the next 15 years, or R24 500 per month escalating at 7% per year to achieve his goal.
Just to show the impact of compound interest:
If funds are put aside on a monthly basis for the full, let's say, 43 years of the working life of an individual, then R771 per month will be required without an escalation, or R411 per month escalating at 7% per year to achieve the goal of R19.8m.
This shows the importance of starting investing early in one's career.
The above examples are rough estimates and based on a 14% return per year.
Any variance on this will provide a different outcome, but at least some perspective can be obtained.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
I am 49 years old. I am working for the department of health (DoH).
Hopefully, I will have about 15 years to build on my Government Employees Pension Fund (GEPF). However, I only started contributing in 2010.
How much will I have to save separately from GEPF in order to make sure that I have at least a fair retirement income? And where do I start?
Marius Fenwick, chief operating officer of Mazars Financial Services, responds:
In order to retire at a level of between 75% and 100% of your final salary, it is generally accepted that you need to save at least 20% of your salary for the duration of your working life, which is normally about 40+ years. This includes contributions towards retirement funds.
In other words, if the total contribution towards your retirement fund amounts to 10%, then a further 10% of your salary should be invested voluntarily.
There are many variables that will influence this; the most important will be the actual net returns achieved over the period of investment.
It is important to note that a 1% per year difference in net returns over the period will amount to over 20% difference in capital accumulated over the period.
This will determine your ultimate income level, and how comfortably you will be able to retire.
A major factor, and one commonly encountered, is where individuals were either unable to contribute the required amount for the full duration or where previous pension funding was spent when changing employment.
This will result in the base amount being reduced, so that a substantially higher amount needs to be invested on a regular basis to make up the shortfall.
In the case of this user, who has 15 years until retirement, the amount to be invested will depend entirely on current funds accumulated.
The impact of compound interest is profound. Let's look at this by way of an example:
Assuming you require R30 000 per month to retire at today's value, a capital amount of about R7.2m will be required today.
If the same amount is required in 15 years, the inflation impact at 7% per year will mean that R19.8m will be required in 15 years.
If we assume an investment return of 14% per year, the following will apply:
Scenario 1
Let's say the client has accumulated R1m to date. Then a total (pension and voluntary) monthly contribution of R12 630 per month without escalation will be required for the next 15 years, or R8 850 per month escalating at 7% per year to achieve his goal.
Scenario 2
If no capital has been accumulated to date, then a total monthly contribution of R35 000 will be required without escalation for the next 15 years, or R24 500 per month escalating at 7% per year to achieve his goal.
Just to show the impact of compound interest:
If funds are put aside on a monthly basis for the full, let's say, 43 years of the working life of an individual, then R771 per month will be required without an escalation, or R411 per month escalating at 7% per year to achieve the goal of R19.8m.
This shows the importance of starting investing early in one's career.
The above examples are rough estimates and based on a 14% return per year.
Any variance on this will provide a different outcome, but at least some perspective can be obtained.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.
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