Retirement is seen as a stage in your life where you can live off the investments you have accumulated over your working career. In these modern times where people are living that much more longer we need to revalue our financial freedom. It doesn’t have to be 65 and can be much earlier if you take control. Realistically, it probably will be much later.

The big question is how much do you need to set aside for my future financial freedom and the answer lies close to the proverbial “How long is a piece of string?”

There are some guidelines which have been established in financial services over the years which are certainly not exact and conclusive but let’s share them and see how they may help.

The 15% Rule

This percentage is bandied around as the starting point for savings for your future. Pension funds tend to use this percentage as the contribution level for their members. This provision is more realistic the earlier one starts to save but as you get older the amount becomes less significant.

For example: If you start at age 20 earning R15 000 your 15% savings is R2 250 per month.

Saving to age 60 which is 40 years will arrive at an amount of R12,5 million. Starting at 30 with the same amount will arrive at an amount of R4,6 Million. Staring at 40 will arrive at an amount of R1,6 million.

So it is clear that the amount of time over which you save is significant.

Formula

Another way to assess how much you need is to divide your annual income requirement at retirement by a factor of 0,05.

If you need R15 000 multiply this by 12 and then divide by 0,05 which amounts to R3,6 million.

Multiple of your monthly income need

240 times your monthly salary is a way to assess how much you need. Say you earn R15 000 per month then this multiplied by 240 is the amount you need at retirement which amounts to R3,6 million.

Capitalisation

Financial planners calculate the amount required by capitalising on the income needed. Taking into account inflation -return – time. A monthly income need of R15000 for a 15-year period amounts to R3 470 695. This amount will change significantly if any of the variables are adjusted. So one should adjust to it by frequently reviewing your savings performance over time.

Whichever way you look at it your savings need to be reviewed frequently to see how they are performing in line with your future financial freedom. Keep close and don’t underestimate the fact that we are living longer.