The concept of a comfortable retirement is something most South Africans have in the back of their minds but what is a comfortable amount to retire on?

Paul Hutchinson, a sales manager at Ninety One noted that retiring with a comfortable amount of money means being able to maintain the standard of living to which you are accustomed to.

It is an arbitrary and daunting notion but Hutchinson breaks it down into two figures.

He said that if you want a pension that is equal to the salary you are earning now then you need to have savings of 20 times your annual salary in your last working year.

“With this starting income level of 5% of retirement capital as your standard, we are able to calculate that you require a capital lump sum equal to 20 times your final salary to invest in an income-producing annuity on retirement,” he explained.

“This is the amount required to generate an income equal to 100% of your final salary, post-retirement (a replacement ratio equivalent of 100%).”

“Drawing no more than 5% is considered likely to provide you with an inflation-adjusted income for 30 years, ensuring a comfortable retirement,” Hutchinson added.

The financial advisor said that any capital lump sum of fewer than 20 times will result in a lower starting income (a lower replacement ratio) than your final salary and therefore you would need to reduce your monthly expenditure accordingly.

So what does this mean in real terms? If you earn R500,000 a year then you need R10 million savings at retirement.

If you earn R250,000 a year then you need R5 million in your savings for retirement.

This money should last you for around 30 years after you retire so you need to have saved 20 times your final salary before tax, according to Hutchinson.

How can you do this?

Hutchinson said that one needs to start early and advised that it is never too late.

“While knowing how much you require is critical, so too is knowing where you are on the path to this lump sum. Arriving at a sufficient retirement pot is a journey that takes a full working lifetime,” he said.

He uses the following formulas to illustrate the impact of starting early:

Starting at working age 20: 15% of pre-tax salary x 40 years of employment = 20 times income required at age 60

“In this example, someone starts working at age 20 and saves 15% of their pre-tax salary every month for their entire working career. And, in the event they change jobs, they preserve their existing retirement savings. This proverbial unicorn is one of the minority who can retire comfortably at age 60”.

Staring to save at age 30

Hutchinson acknowledged that a large proportion of South Africans start to save later in life for their retirement and has a formula for those individuals.

Starting 10 years later at the age of 30 means that you need to save 30% of your pre-tax salary for 30 years of employment in order to equal 20 times the income required at age 60.

“A more realistic example is where someone does not start providing for their retirement from age 20 or does not preserve their retirement benefits when they change jobs in the first 10 years. They are then required to save twice as much of their pre-tax salary for the shorter 30-year period to achieve the same outcome or retire at 70,” he explained.