IN BLACK AND WHITE

 

Retirement in numbers

There are three types of people in the world: Those that make things happen; those that let things happen; and those who look back and ask, "What happened?"

I am not entirely sure of the source of that quote but it is rather apt when it comes to the various ways in which we plan for retirement.

We are coming to the end of yet another year. If you are anything like me, you will once again be dismayed at how quickly the last 11 months have passed. That in turn usually lends itself to a timely, albeit unwelcome, reminder that life is literally flying by.

As we evaluate the success’ and failures of 2012, and even contemplate our annual New Year’s resolutions, I thought it would be useful to stick some numbers on a hypothetical retirement plan in the hope that many will be encouraged to shift their financial planning needs a little higher up the priority list going into 2013.  

 

6.00%           
The proportion of South African retirement fund members who retire financially secure. (1)

The top of the range for South Africa’s Monetary Policy Committee’s inflation target.

The average annual nominal return from South African cash and equivalent investments since 1900 (2)

 

12.50%          
The average annual nominal return from South African equity investments since 1900 (2)

 

R1 225 000.00   
The equivalent annual income that  a 22 year old, earning R100 000 today, who wishes to retire at 65, will need to earn from a retirement annuity at retirement. (3)

 

1125%             
The amount by which the cost of living will have risen over the working life of that individual if  inflation averages six percent a year. (3)

 

R245.00        
The cost of two litres of milk in 43 years time assuming a 6% inflation rate and current price of R20. Just to put the overwhelming 1125% increase in price levels into a bit of perspective.

 

516                
The number of pay checks a 22 year old will receive over her lifetime if she works until 65. Think of this as the number of opportunities she has to contribute to her savings plan over her working life. Not many is it?!

 

4.68%               
The annuity rate available today if she buys an escalating joint life and survivorship annuity. (4)

 

R26 180 000.00
The amount of retirement savings she will need to target, in order to purchase an annuity that will provide her with the annual equivalent income of R1 225 000 mentioned above using today’s annuity rate. (4)

 

R1 750.00        
The amount a 22 year old must put away each month, from the start of her career,  to achieve this savings target if she invests solely in equity markets. (5)

 

R 11 650.00      
The amount a 22 year old must put away each month, from the start of her career, to achieve this savings target  if she invests solely in cash and equivalents.(6)

 

R5 750.00            
The amount a 22 year old must put away each month to achieve this savings target  if she delays her retirement savings plan until she is 32 years old and invests solely in equity markets. (7)

 

R19 400.00         
The amount a 22 year old must put away each month to achieve this savings target  if she delays her retirement savings plan until she is 42 years old and invests solely in equity markets (8)

 

Now before we all get too despondent about what these numbers suggest, we need to put them in context. You are likely to earn more and therefore be able to save more as your career progresses. Your spending habits are under your control and you can make significant progress towards a successful retirement by controlling how and where you choose to spend, or more accurately, choose to save.

All forecasts are subject to some rather large assumptions. The actual rate of inflation, your actual return on investments, your saving contributions and the eventual annuity rate you receive are all going to have a significant impact on the final outcome.

 
Key messages to take away from the numbers:

Most of us do not have sufficient savings by the time we retire.

The majority of this shortfall stems from the fact that we do not plan as well as we should during our working lives.

Don't delay saving for retirement any longer. The younger we start planning and saving for retirement the easier it is to achieve our goals.

Be conservative in your assumptions when planning for retirement. Don’t overestimate returns and don’t underestimate inflation.

Have a target and monitor the changing variables over the life of your retirement plan so as to minimise any nasty surprises long before you reach retirement.

 If you have not started saving for retirement DO NOT despair - take control from this point onwards and ensure that  you save what you can so that at least a proportion of your retirement income is secured. 

Please note that the content of this article does not constitute investment advice. Contact White Investments if you have any queries regarding the content of this article or require assistance in compiling a retirement plan.

NOTES:

1) Source is the Old Mutual Savings & Investment Monitor July 2012

2) Credit Suisse Investment Returns Handbook February 2012. Data is up to the end of 2011.

3) White Investments retirement planning calculator. Assumes a rate of inflation of 6% over the 43 years to retirement. Note the actual level of inflation in SA since 1981 is 9.7%. (http://www.tradingeconomics.com/south-africa/inflation-cpi)

4)The source is Metropolitan’s rates from the Personal Finance Magazine as at 01 October 2012. The annuity rate used assumes an escalating annuity guaranteed for 10 years and then for life. The 4.67% calculated here is based on being paid R389.94 a month increasing by inflation.

5)Source: White Investments retirement planning calculator. Assumes a rate of inflation of 6% over the 43 years to retirement. Assumes we earn nominal investment returns of 12.5% a year on a 100% allocation to South African equities over that full period.

6)Source: White Investments retirement planning calculator. Assumes a rate of inflation of 6% over the 43 years to retirement. Assumes we earn nominal investment returns of 6% a year on a 100% allocation to South African cash and equivalent investments over that full period.

7)Source: White Investments retirement planning calculator. Assumes a rate of inflation of 6% over the 33 years to retirement. Assumes we earn nominal investment returns of 12.5% a year on a 100% allocation to South African equities over that full period.

 8) Source: White Investments retirement planning calculator. Assumes a rate of inflation of 6% over the 23 years to retirement. Assumes we earn nominal investment returns of 12.5% a year on a 100% allocation to South African equities over that full period.

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