How much you need to retire
Wim asks: What is a comfortable minimum-size pension to have, as expressed in terms of the number of times of your retirement annual salary when you retire at 65 years old?
Maya replies: The concept of “minimum” depends on how you envisage your retirement—whether you are talking about survival or being able to go on holiday three times a year. Ideally you want to be able to maintain your current lifestyle.
Buying a single life annuity
A retirement lump sum of 15 times your final annual salary would buy you an inflation-linked annuity income equal to your final salary based on current annuity rates.
According to Ryan Knipe, head of retail marketing at Alexander Forbes, at the age of 65, R1-million would buy you R67 000 of income per year at current rates. So, for example, if you earn R400 000 a year, you would need R6-million on retirement, which would provide you with R400 000 of income a year increasing each year by inflation.
Buying a joint-life annuity
If you wanted a joint life annuity that continued to pay the income to either surviving spouse, you would need a retirement lump sum of 20 times annual salary, as a joint annuity pays out R50&nsp;000 per R1-million per year.
Understanding final salary
When calculating your final salary, remember you only receive about 80% of your salary before tax as other cost-to-company deductions like travel allowance and pension contributions are deducted. That is why many financial advisers talk about replacing only 80% of your final cost-to-company salary.
However, the mistake that you must NOT make is that life as a pensioner will be cheaper. You may have paid off your home and not have work-travel costs, but you will incur other costs like increasing medical expenses and more leisure time to fill.
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