There is a major gap between expectation and reality when it comes to saving for retirement.
Many South Africans don't consider that they need to replace their current income once they retire from work.
According to Ferdi Booysen, head of client solutions at Old Mutual Wealth, this is why it is important to first determine what amount of income you want to receive from your retirement funds. This is in order to determine what you need to save now to be able to maintain your desired standard of living during retirement.
For example, if you decide you want to receive an income of R20 000 per month after tax for 25 years (increasing with inflation every year) you can then ascertain how much you need to put away each month to achieve this lifestyle goal.
A 30-year old, who wishes to retire at 65 and wants to sustain the above mentioned after-tax income until age 90, would need to contribute R5 000 per month to a retirement annuity (increasing with inflation every year).
If he or she started contributing five years earlier (at age 25), this amount reduces to R3 900 per month (22% less) based on Old Mutual Wealth's assumptions.
"Visualising what your retirement will look like with current provisions is not the easiest thing to do on your own. This is why it is extremely useful to create a lifetime cashflow model or view that includes short-, medium- and long-term financial goals," says Booysen.
“When you start with the end-goal in mind, you are more likely to achieve the end-goal as you know exactly what path to follow. When you have determined your end-goal and know what you need to do to get there, it is extremely important to stick to your plan and not deviate from the path."
However, life happens and there might be some unexpected events that lead to unexpected expenses.
Booysen suggests that a financial planner should be able to assist you to rework the plan after an unexpected turn of events to get you back on your road to the end-goal within good time.