/ 21 June 2010

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. This would mean that you would continue to receive the same income, which would keep pace with inflation each year.

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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