February is the time to calculate whether you have fully utilised your tax-free retirement savings. So sit down and assess whether you are on track with your retirement fund.
25- to 30-year-olds
The rule of thumb is that if you save 15% of your salary for 35 years you will have enough saved to provide you with an income of 70% of your final salary in retirement. In other words, you will be comfortable, if not rich. Yet 70% of people cash in their pension funds in their 20s and 30s, reducing their retirement fund by nearly a quarter, which will make them dependent on the state or family in retirement.
Although these first five years of saving make up only about 12% of your total contributions, because of the impact of compounding growth (interest earned on interest), they will make up nearly one-quarter of your retirement fund. So, if you don’t start a retirement fund at 25, or you cash out your pension at 30 when you change jobs, you will have a shortfall of nearly 25% on retirement.
And if you think you will be able to catch it up in your 30s - think again. According to Rowan Burger of Liberty, you would need to save 25% of your salary from the age of 35 until retirement to catch up the loss — yet this is at a time that you will be taking on more financial responsibilities such as a home and starting a family.
It is unlikely you will have the additional money to save.
35- to 45-year-olds
The good news is that there is a way to boost your retirement funds if you have left it a bit late — by delaying retirement and investing more aggressively.
According to Jeanette Marais of Allan Gray, if you start saving for retirement at the age of 45, to achieve a retirement income of 70% of final salary, you will need to save approximately 30% of your salary or achieve an investment return of 15% above inflation.
Although it may be impossible to achieve such a high investment return, by achieving a return of 7% above inflation you’ll have to save only 25% of your salary. And if you work until 70 instead of 65 and earn a regular return of 7%, you’ll have to save only 12% of your salary.
Working longer is a viable option, considering that the average person is expected to live until 90 years old now. What you are really trying to achieve is to save 15% of your salary for 35 years to retire comfortably. So, if you start saving only at 30, you would need to work until 65 and if you started only at 35 you would need to work to 70. The one problem with this strategy is that most companies retire people at the age of 60 or 65 — so you would have to find an alternative career for your later years and this is a big risk.
If you can’t save for longer, then you need to invest more aggressively — you simply cannot afford the pedestrian returns from low-risk funds. Although equities outperform other assets over time, the past two years have proved how volatile this asset class can be.
Deciding what percentage of your capital to invest in the different asset classes is tricky, so Marais suggests an asset allocation fund. With an asset allocation fund, such as a balanced fund, the experts actively determine the mix of bonds, cash, equities and property in your portfolio on an ongoing basis, depending on market conditions.
Ultimately, you need to find a balance between working longer and increasing your investment risk — and for this you regularly need to review your retirement strategy.