What is the most important financial product? This is a question I am often asked. In the world of true financial advice this is a question that takes time to answer.

 

Statistically everyone dies (except Robert Mugabe and Keith Richards, they just seem to be immortal) so life insurance needs to be considered into the equation, but not for the sake of selling a policy. Life insurance is quantifiable, but there will be more on this in the next article.

 

The second most likely actuality is retirement but with only 6% of South Africans able to retire with a liveable existence, this is a matter that needs a lot more attention. If you consider that the new government pension amount is R 1,690 PER MONTH, taking care of this yourself is paramount.

 

MAGIC EQUATION

Is there a magic equation to work out how much one would need for retirement? Well, yes. It’s not 100% accurate because you’re working in the world of investments where there are few guarantees, but these 2 models are close enough to be useful.

  • – To retire at 65 with a liveable income you would need to save 15% of your take-home salary for 30 years and receive a return that is 6% above inflation.

 

  • – If we wanted to work out what our goal at retirement would be, aim to have saved up 20 times what your annual salary would be in your last year of work if you are retiring at 65.

 

One thing these calculations do not factor in is the ongoing improvements in the medical field meaning we’re likely to be living much, much longer and this means that we’ve got a lot more living to fund in a future that is encumbered by inflation.

 

THE TIME VALUE OF MONEY

The most important key to retirement saving is time. The earlier you start, the stronger your position.

  • – If you put R250 away monthly between 24 and 30, and then leave those savings in your account, you’ll be worth R479 453 by age 65.  This is based on an interest rate of 9% (assuming 6% inflationary returns, plus 5% real returns, with 2% subtracted for fees). 

 

  • – On the flip side, put away R250 between 35 and 65, and you’ll only end up with R425 528.

 

So how can someone investing for 6 years have more than someone investing for 30? Compound Interest. Einstein called it the 8th Wonder of the World and he was spot on.

 

Not only is retirement saving a powerful way to reduce how much tax you pay (up to 27.5% of your taxable income can be invested for a full tax deduction), but more importantly, if you want to ensure your Autumn years are not spent sponging off your kids or dumpster diving to survive, it’s best to make sure that you start early, and save enough.

About The Author

Steve Hughes

Steve Hughes is an independent financial advisor specialising in personal and business solutions. He has a passion for empowering people through better understanding and has created a fresh and highly sought-after approach to financial planning. He is the founder of the PLATINUM model of fringe financial services and the PLATINUM EVENTS, and you can catch him on LIFE MATTERS, OneFM 94.0’s weekly business & finance show which he produces and presents. As a private wealth consultant and business owner, his approach to personal and business consulting is industry leading, and it is his desire to reshape the financial service world that drives his passion. Steve can be reached at steve@stevehughes.co.za.

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