Retire Secure

How much is enough to retire on?

“I am often asked this question by those considering retirement and particularly if they are considering withdrawing their actuarial fund value from the GEPF.”

The answer is that it obviously depends on each person. However, there are some simple rules that you can follow to establish what your income needs to be.

 Establish your realistic budget - by the time you retire you should have settled your debt and your remaining expenses should be more about your lifestyle. Remember to include all expenses such as medical aid, food, electricity, rates, petrol, short term insurance, cell phones and entertainment. Let’s assume this comes to R15 000 per month.


Multiply your budget by 12 – We now establish your annual budget in today’s money. Note we are not worried about 10 years’ time and the effects of inflation, but rather a realistic current budget.  So in our example this would be R15 000 x 12 = R180 000

 Now the magic formula – The next part is easy to calculate and one that every person should have in mind. It is your financial freedom number, the amount you will need to retire on. Simply take the amount calculated in step 2 and divide this by 4.5% or 0.045. So in this case R180 000 / 0.045 = R4 000 000. Thus a lump sum invested in a balanced portfolio should provide an income of R15 000 per month for life and never run out.

But what about inflation? – The great part about this formula is that it allows for your income to grow over this period at inflation. All things being equal, your income will increase each year in line with inflation and the capital invested will grow.

And when I pass away? – The lump sum would have grown to then provide a similar income for your spouse or inheritance for your family.

What if I withdraw more than 4.5%? – If you withdraw more than this amount, you run a risk of depleting your investment over time. It may grow in nominal terms, but the actual real buying power will gradually diminish. If you are over this amount, then you need to be careful with your budget and your investment. Look to manage all costs and even supplement your income.

     
      The key remains that you need to invest in a properly structured investment portfolio which is balanced across asset classes. Look out for an advisor who has the proper education and ability to help you construct your investment in a tax and estate efficient manner. Watch out for excessive up-front fees and ongoing fund and management fees as these can have significant effects on your future income.

Charles Horner is a CERTIFIED FINANCIAL PLANNER® and a retirement and investment specialist with Sanlam. He writes in his personal capacity and this article and opinions must not be construed as advice in terms of the Financial Advisory and Intermediary Services Act.