"There are still far too many South Africans who will find themselves out of pocket long before they die," says Derick Ferreira, head of product management at Old Mutual. "This is because they start too late, just aren't saving enough or are using the wrong vehicles in which to save."
Ferreira adds that often people reach retirement age before realising that there just isn't enough to carry them through for another 20 to 30 years. This means they must continue to work for a number of years or lower their standard of living, or both.
"If you retire at the age of 65, you need to accumulate between ten and 14 times your annual salary until you retire," says Ferreira. "This should help you to have a retirement income that is at least 75% of your salary." For example, if you are 25 years old, earning R10 000 a month and start saving R1 200 a month from today, you will have accumulated capital equal to ten times your annual salary by the age of 65 (taking inflation and increases into account, both at 5%). However, if you are 45 years old, you need to put away R3 600 a month to reach the same multiple by the age of 65.
Many people outlive their retirement savings because they choose a living annuity with excessive draw-down rates and use too much of their savings in the early years of their retirement. Current thinking suggests that if you expect to live longer than the age of 80, you might be better off buying a guaranteed annuity that increases over time with inflation. Although the initial income may be lower than what you could draw down from a living annuity, it may be higher at a later stage in life if it increases with inflation. You also have the added benefit of a certainty of income for as long as you live.
"Due to increasingly sophisticated retirement products, it is vital to speak to your financial adviser about the best way to plan for your retirement, no matter which life stage you are currently in," concludes Ferreira.
