A crucial question in financial planning is: “How much do I need to save to comfortably maintain my standard of living in retirement?”
Addressing this correctly and promptly is critical, as retirees have different needs and risks compared to other investors. They require a steady income that ideally rises with inflation and face the risk of outliving their savings.
Financial services firm
NinetyOne
stressed the importance of considering these factors, along with the psychological aspects, since relying solely on the state pension, returning to work, or depending on family is often not viable.
NinetyOne’s in-depth study on retirement income provision highlights the importance of choosing the right starting income level. They suggest that retirees should begin with an income level no higher than 5% of their retirement capital.
Additionally, active management and growth assets play significant roles in maintaining a stable income despite market volatility.
Five and Twenty: The Key Numbers
To ensure a comfortable retirement, aim for a starting income level of 5% of your retirement capital. This means you need a capital lump sum equivalent to 20 times your final salary to invest in an income-producing annuity.
This setup aims to provide an income equal to 100% of your final salary, adjusted for inflation, for about 30 years. Any amount less than 20 times your final salary will necessitate a lower starting income and reduced monthly expenses.
Start Early – But It’s Never Too Late
Understanding how much you need is essential, but so is knowing your progress toward that goal. Achieving a sufficient retirement fund is a journey that spans your working lifetime. Consider these formulas to illustrate the impact of starting early:
Are You on the Right Path?
To gauge your progress, use the following milestones. By age 40, you should have saved approximately 5 times your annual salary if aiming for a 100% replacement ratio.
The chart below also shows the multiples required for a 75% replacement ratio, which might be sufficient for some retirees depending on their lifestyle and financial obligations.
Note how savings accelerate due to compounding: it takes 20 years to save 5 times your salary, but only 10 more years to double it to 10 times, and another 10 years to reach 20 times.
The Role of Active Management
A key assumption is a portfolio return of 7% above inflation, which, combined with compound interest and regular contributions, should provide a sufficient retirement lump sum.
Saving 15% of your pre-tax income for 40 years at this return rate should enable you to retire comfortably, withdrawing 5% annually. If returns are higher, at CPI + 9%, you could accumulate 35 times your final salary.
