Maybe the numbers below will scare you. Maybe you’ll be pleasantly surprised. Either way, know that you have the power to change your circumstances if necessary. So, to the question at hand. How much should you have saved toward retirement given your age? My research on the topic uncovered the following consensus:

By age 30 you should have the equivalent of your annual salary at the time saved

By age 40 you should have the equivalent of three times your annual salary saved

By age 50 you should have the equivalent of six times your annual salary saved

By age 60 you should have the equivalent of eight times your annual salary saved

By age 65 you should have the equivalent of ten times your annual salary saved

 

Early career

If your working career is just beginning, then you have the luxury of reading this advice before you can fall behind on your savings journey. Don’t repeat the mistake that so many of us have made; start saving right away. 15% of your salary, every month, is the least you should be putting toward your retirement.

A great hack to establish a good savings regime is to schedule a monthly debit order. Make it the first deduction from your salary. If you only save what you have leftover at the end of the month, you risk having nothing to save. Your company’s benefit scheme might make a deduction from your salary on your behalf. This amount is automatically invested into either a pension or provident fund. You have some say in how it is invested. Be sure to check what percentage they are deducting, and whether they are making any contributions to that fund (lucky you if they are).

Let’s look at how that 15% gets you to the savings targets set out at the beginning of this piece. I’ve assumed that inflation will be constant at 6% over the period. Say you earn a salary of R350 000 per annum (p.a.) when you start working. You receive increases of 6% per year over the next 10 years. At age 30, you salary would have grown to approximately R626 000 p.a. If you save 15% of every monthly salary and those savings grow at 8% per annum — I’ll spare you the calculation — you’ll have accumulated savings of about R1 million over those 10-years. Pat yourself on the back, you’re ahead of the consensus target.

Without any withdrawals, and assuming your increases and returns are the same as above, you’d have in the region of R3.9 million by the time you reach 40. Compare that amount to your annual salary of R1.12 million (given a continuation of your 6% p.a. increases) and you’re still ahead of the curve.

There are many assumptions made in the calculations above. Perhaps the biggest is the 8% return from your investments in either the pension or provident fund you’re a member of. Obviously you want the highest returns possible. But the higher your targeted returns, the more risk you’ll need to take on. Risk can be a good thing when you’re young, but it should moderate as you get older. It’s important to remember that investment returns are largely out of your hands, so don’t rely on them to make up for your savings shortfall. What you can control is how much you save. Focus on that.

Mid to late career

Let’s talk about those of you with a bit of experience under their belts, and perhaps a few bad savings habits — don’t worry, you’re not alone — that need to be addressed so that you can retire as planned.

The first step is to compare your accumulated retirement savings to your annual salary and gauge where you are on your savings journey. If you’re behind the curve, don’t worry. The most important thing is to recognise and acknowledge there’s a problem. Then you can act to rectify the situation. At this stage of your life your financial circumstances likely have some complexity baked into them. A financial advisor can help you pull all the pieces together in a manner that makes solving your savings dilemma easier. They would likely pose questions such as:

• How do you envisage your retirement? What are you not willing to compromise on?
• Have you got a budget? Does it work for you?
• What are you spending on discretionary items? Is there scope to reduce that spending?
• Are you taking advantage of scale to reduce your costs with insurance providers and credit providers?
• What does your credit score look like and have you tried to negotiate better interest rates on your debt?

The answers to these questions, and many others like them, will have a material impact on your savings strategy and what changes you need, or don’t need, to make. But if you are behind on saving for your retirement then you need to accept that changes need to be made, and those changes might be uncomfortable at first. However, putting a plan in place that will move you toward a comfortable retirement will drastically reduce the subconscious stress of not having enough money to retire. Your health, if nothing else, will benefit from your action.

Other savings to account for

You should have at least three times your monthly salary saved for unexpected costs in an investment or savings vehicle, known as an emergency fund. It’s called an emergency fund because it must only be used in emergencies. A craving for an expensive pair of jeans is not an emergency. Paying the insurance excess after a car crash is an emergency. An emergency fund is a crucial buffer to have in place to protect your retirement savings from being raided when unforeseen expenses arise, which they will.

Then comes savings for short and medium term goals, like a deposit for a home, personal development, or a special holiday. If you struggle with managing savings for multiple goals in the same vehicle, then open accounts for each goal you want to achieve. 

Just remember that the savings we’re talking about in this section are secondary, and in addition to the 15% you’re putting away every month for your retirement.

Win the daily battles, win the war

The earlier you start saving the more you will enjoy the magic of compounding. And the greater chance you’ll have of achieving financial independence in your retirement years. But this long-term goal is only achievable if you pay attention to your daily spending. Work out how much money you earn per hour at work. Divide your take-home salary by 22 (number of working days in the month), and then divide it again by the number of hours you work per day. Maybe you earn R200 an hour. Then ask yourself, would you work for two hours to pay for that R400 take-away dinner?

No one plans for their future perfectly. We all make mistakes along the way. But ignoring the reality that retirement will eventually come is not something we can afford to do. If you think you’re behind on your retirement savings, either start putting a plan together as to how you’re going to rectify the situation, or, if you don’t know where to start, ask a financial advisor to help you with a solution.