If you're seeking to monitor your progress toward a goal, there's likely an app for that. You can track everything from your daily steps and deliveries to your diet and your family's whereabouts. But when it comes to saving for your retirement, how much effort do you put into tracking your progress? And when should you start paying attention?
Retirement planning can be daunting at any age, especially early in your career when retirement seems like a distant future. With so many immediate financial priorities, such as paying off student loans or saving for a home or your children's education, planning for retirement can easily take a backseat. However, it's crucial to make steady progress toward saving, regardless of your age. Regularly assessing where you stand can help you plan more intentionally based on your situation.
In South Africa, as in many other places, people often rely on approximations or rules of thumb for financial decisions. Many financial institutions provide savings benchmarks that indicate ideal savings levels at different ages relative to an individual's income. While these benchmarks aren't a substitute for comprehensive planning, they offer a quick way to gauge whether you're on track and can motivate you to start saving more.
For the benchmarks to be effective, they must be realistic. Setting them too low can create a false sense of security, while setting them too high can discourage action. After much deliberation, my colleagues and I have recalibrated these benchmarks with a clear goal in mind: to determine the amount of assets needed by age 65. This figure varies depending on many factors, with income being the most significant. Since higher earners will receive a smaller portion of their income from retirement funds, they generally need more assets relative to their income. We estimate that most South Africans aiming to retire around age 65 should target assets totaling between seven and 13½ times their preretirement gross income.
We've established savings benchmarks for other ages based on a reasonable trajectory of earnings and savings rates. We don't assume that everyone starts saving 15% of their income immediately upon receiving their first paycheck. Instead, our hypothetical investor begins saving 6% at age 25 and gradually increases their savings by one percentage point each year until reaching an appropriate level. We suggest that 15% of income per year (including any employer contributions) is a suitable savings rate for many people, but higher earners should aim beyond 15%.
So, what should you have saved by ages 35, 50, and 60?
By age 35, having one to one-and-a-half times your income saved is a reasonable target. By age 50, you're on track if you have three to six times your preretirement gross income saved. And by age 60, you should aim to have 5.5 to 11 times your salary saved to be on track for retirement.
For example, a 35-year-old earning R600,000 would be on track if they've saved about R600,000 to R900,000.
The benchmarks for those closer to retirement provide more detailed estimates based on income and marital status, which affect retirement fund benefits.
Staying on track involves more than just meeting benchmarks. It's about taking action and making informed decisions. If you're not on track, don't despair. Focus on the steps you can take to improve your situation:
- Take full advantage of your employer's retirement plan match.
- Increase your savings rate as soon as possible, or gradually over time.
- Put an automatic increase on your contributions.
- If you're age 50 or older, make catch-up contributions to your Retirement Annuity
For more insight into your retirement savings status, consider using tools like our retirement income calculator to test different scenarios. Use these savings benchmarks to become more comfortable with retirement planning, and then delve deeper to fully understand your potential retirement expenses and income sources. Beyond your savings, think about your retirement goals and how you envision spending your time after years of hard work. After all, that's the ultimate reason for saving.