As South Africans plan for their futures, one of the most crucial elements to consider is the rising cost of living over time.

While retirement may feel like a distant goal, proper planning is essential to ensure that individuals are financially secure when the time comes, says financial services group, Nedbank.

Retirement planning can seem daunting, especially when faced with the uncertainty of what the future may hold.

For a 25-year-old today, the idea of retiring at 65 seems far off, making it hard to predict what living expenses, salary levels, or inflation will look like in 40 years.

Yet, without knowing these figures, how can one possibly determine how much to save?

Nedbank suggests that projections based on historical financial trends and current inflation patterns can offer valuable insights into future living costs.

By examining past behaviors and current economic indicators, financial experts can make informed estimates about the future.

These estimates are not guarantees but serve as helpful tools in shaping a retirement strategy that accounts for personal circumstances such as marital status, family life, and the timing of retirement.

Hypothetical case study

To illustrate how one might approach retirement savings, Nedbank used the following hypothetical example.

Consider a 25-year-old earning R20,000 a month with monthly expenses of R15,000.

Financial advisors recommend saving between 10% and 17% of one’s salary at this stage. In our example, we assume the individual saves 17.5%, which amounts to R3,500 per month.

Over the course of a career that might span 40 to 50 years, the goal is to save enough to cover the costs of retirement, which could last another 30 to 40 years.

Assuming a salary growth rate of 5% per year, an average annual return of 10% on investments, and inflation of 4%, Nedbank broke down how these savings might grow over the decades.

By the time a hypothetical individual reaches 35, their salary would have increased to around R32,500, with monthly expenses rising to approximately R22,000.

If they continued to save 17.5% of their salary, they would have accumulated roughly R850,000 in retirement savings after 10 years.

At 45 years old, their savings would have ballooned to around R4 million, while their salary would reach about R53,000 a month, and monthly expenses would climb to R33,000.

By age 55, the individual would have amassed R12.5 million in retirement savings, with a monthly income of about R86,000. Their monthly expenses at this point would mirror what they were earning a decade ago.

Reaching 65, they would have accumulated R34 million in retirement savings, which might seem like a substantial amount at first glance.

However, the picture changes when considering the effects of inflation and medical advances.

By the time they reach 95, their monthly expenses could soar to an eye-watering R235,000, leading to total expenses of nearly R50 million over the 30 years of retirement.

The challenge lies in the fact that while expenses during one’s working years total an estimated R17 million, retirement expenses could more than triple.

Therefore, it’s crucial not to underestimate the importance of saving as much as possible during your working life. Starting early can significantly ease the financial burden in later years, ensuring a comfortable and secure retirement, Nedbank said.