RETIREMENT PLANNING
Your path to financial security with Anchor

Below, we discuss the steps you need to take to determine your retirement outlook. If you prefer to speak directly to a financial advisor and have them walk you through the calculation, please get in touch with us at invest@anchorcapital.co.za.

Alongside this document, we have included a simple calculator.

*Please note that this is a general guide only. There are more sophisticated programmes available. Everyone’s circumstances differ, and we encourage you to consult a financial advisor.

In retirement, there are three stages. In each stage of retirement, your expenses will differ.

1. Active – Travel and holidays, fun, clothing.
2. Passive – Age 75 and upwards – expenses may drop because you may not be doing as much as you did previously.
3. Frail – This relates to health concerns, food and accommodation. Lifestyle events become less important.

Step 1 – Calculate your income requirements at retirement

Calculate your annual expenses in today’s terms:

• If you are in retirement, you probably know your expenses.
• If retirement is some years away, you need to subtract those expenses that will fall away at retirement from your current expenses (at today’s cost). e.g., a bond, schooling, motor car payments.
  • If any expenses are being paid for you now, you need to add these expenses to your budget.
  • You now have today’s income needs.
  • Take this figure, for example, R30,000, and escalate this by a conservative inflation rate. We recommend using 7%.
  • In later steps, when it comes to investment returns, we will use an investment return 3.5% higher than this inflation rate. For example, if you use an inflation rate of 7%, the investment return you will be looking at is 10.5%. However, if the inflation rate is 8%, you will need an investment return of 11.5%.
  • This gives you the income you will need each month at retirement.
  • Assuming you are 50 years old, needing R30,000/month today, at an inflation rate of 7%, when you retire in 15 years at age 65, you will need R82,771/month.
  • Now multiply this number by 12 to get your annual income needs at retirement.
  • R82,771 x 12 = R993,251 per annum.

Step 2 – Calculate the capital required at retirement

Use the formula below to calculate how many times your current annual after-tax income you will require.

FORMULA EXAMPLE:

1. 85 minus your age (say you are 50) 85-50 = 35
2. Divide that by 7 35/7 = 5
3. Multiply that by 3 5 x 3 = 15
4. Add 8 15 + 8 = 23

In the example above, one would need 23 times their annual after-tax income in capital.

Now multiply your annual income requirement from Step 1 by the number above:

EG: R993,251 x 23 = R22,844,781. In this example, one would need R22.8mn in capital to cover the expected income needed for retirement.

Step 3 – Calculate what your current savings will be worth

1. Add up the current value of all of your investments (pension fund, endowment policies, shares, investment properties, etc.) and escalate this value by a rate of 3.5% above the inflation rate you used in Step 2 for each year until retirement (in the example, we would use 10.5% – being 3.5% above the 7% inflation rate – for 15 years until you retire at age 65).
2. Do the same calculation above for your monthly savings.
3. Add these numbers together, and you know how much capital you can expect at retirement.

Step 4 – Will you have enough money to retire, or do you need to save more?

What is the difference between the numbers in Step 3 and Step 2? If Step 2’s number is higher than Step 3’s number, you have a shortfall, and you will need to increase your savings or decrease your expected monthly income at retirement.