“I have just changed jobs recently. I took part of my provident fund to settle some of my debts and I have learned my lesson, so no more debt for me. In total I had about R170 000 and I withdrew R70 000. How much do I need to save up for to make up the short fall?” writes Thabo, who is in his 30’s.
Maya replies: Most people by the age of 35 will realise they are not on track for retirement, but it is no need for panic.
It is difficult to answer how much you need to save for your shortfall without knowing how much you earn and how much that R70 000 represents of your income. It may also be a senseless number if you cannot afford to match those savings.
If you wanted to replace it within a year you would have to save around R5 500 a month. If you save R1 000 a month it would take you nearly 10 years to replace the R70 000, let alone the growth that you have missed out on from the lump sum. If you had not withdrawn the money, within 10 years that R70 000 would be worth around R231 000. This is why cashing in retirement funds is not a good idea.
A good starting point is to save whatever your debt repayments were before you settled them with the pension payout. If you spend that money on living expenses then you will definitely start to move backwards.
I would recommend that you speak to a good financial adviser about whether you are on track for retirement and how much you need to be saving. From next year you will be able to save up to 22.5% of your salary tax-free into a retirement product.
You can also do a quick calculation using the Crawford Measure. If for example you need R10 000 to live on after tax and savings, by the age of 30 you would need to have already saved R300 000.
I imagine about 90% of people of your age are in the same boat. What matters is how you start dealing with the problem from today.
Here’s how to manage it:
Keep your lifestyle manageable
You are at the time of your career where you will see significant promotions and salary increases. The key here is not to spend every new cent that you earn. If you have the discipline to continue living a moderate lifestyle by saving 50% of any salary increases and bonuses you will find your savings increasing substantially. This money doesn’t just have to go into retirement savings; you can use it to invest in opportunities to build wealth. Remember every cent you spend is a missed opportunity for building wealth.
Be debt free at 50
Aim to be mortgage free by the time you are 50. When you come to buy a home, make sure your mortgage term will see you having paid off your home by then. For example if you buy a house when you are 35 years old, only take a 15 year mortgage term. This will increase your monthly payments so you may have to be more realistic about the home you can afford. Once your house is paid off you have another 10 to 15 years of saving the money you spent on your mortgage repayments.
Work longer
Many retirement projections are based on a retirement age of 60. With people expected to live until 90 years old, working until you are 70 is not unrealistic. You don’t necessarily have to work at the same job but find a rewarding way to cover your daily income needs.
Those additional years will firstly allow your existing savings to double in value through the power of compounding growth, and secondly it will lower the amount of years you need to fund in retirement, so the amount you need is less.