After recently chatting with a friend employed outside the financial industry I realized that a major gap exists in our education as to how and what to save for retirement. Some of us may not as yet be contributing towards retirement savings. Like me, I suspect, we have the idea to do so when we have a more substantial income or once we have paid off our study-, car- or home loan.
Perhaps an illustration of the capital you will require to retire comfortably will help! Should you wish to retire today and receive a monthly income of R20 000 per month (Far below what many of us may be hoping for) – how much capital would you require?
First things first: Most retirement products buy a Living Annuity at retirement. A Living Annuity invests your retirement capital and pays you a percentage of the capital as income. Ideally you want to draw an income small enough to allow the capital to grow but sizeable enough to maintain your lifestyle.
How much capital would you require to receive a monthly income of R20 000 per month?
At a 5% income rate you will need capital of R 4 800 000 to receive an income of R20 000 per month in today’s value. This income is taxable at your personal income tax rate. You will in fact be left with less than R20 000 per month. This is a large sum of money and could seem a rather daunting target to achieve. To give you a bit more of a scare consider that if you are only retiring in 30 years and inflation averages 5% over that period then you will need R86 438.85 per month to buy the same goods R20 000 will afford you today. So how much capital will you need in 30 years time to receive that income? Get ready for this… R20 745 323.40
To learn how you can achieve your retirement targets… read my next blog!