Your Retirement Savings by Age and Income

As we get older our personal and financial goals will evolve and change. But we’ll never be too old to save for retirement. There are no hard rules when it comes to saving for retirement. What should your retirement savings be according to your age and income?  

When it comes to saving up for retirement, the rule of thumb is to have

  • 1 – 2 times your annual income saved up in your 30’s
  • 3 – 4 times your annual income saved up in your 40’s
  • 6 – 7 times your annual income saved up in your 50’s
  • 8 – 10 times your annual income saved up in your 60’s

That may seem like a very steep request, but you’ll have compounding interest on your side. Which means your money will grow faster because you’ll earn interest on interest. If you want the best results, you should start saving as soon as possible. Which means if you haven’t started yet, the best time to start saving for your retirement is right now

How would you like to live in retirement?

Knowing when and how you would like to retire will play a huge role in how much money you’ll need to retire. Someone who retires at 40 years old will have a different financial plan compared to someone who retires at 65 years old. Most people retire at 65 years old, which means they’ll need to save up enough money to last them at least 20 years.

There are various factors which will determine how much money you’ll need for retirement. You need to consider things like economic factors, medical costs, how long you want to retire for etc. However, your retirement lifestyle will be the biggest factor when determining how much money you’ll need.  

To help you determine how much money you’ll need, paint a clear picture of what your retirement looks like. Where would you live? How much money would you need for groceries and other monthly expenses? What would your medical bill look like?

Once you know how much money you’ll need to retire, you’ll need to set up your retirement savings plan.

Where should you store your retirement money?

The best place to store your retirement wealth is in a Tax-free Savings Account (TFSA) or a Retirement Annuity account.

Although both TFSA and an RA will help you save for retirement, you should understand how they work before committing to an account.

Tax-free Savings Account (TFSA)

Tax-free Savings Account (TFSA) was introduced to inspire South Africans to start saving. In a TFSA all the proceeds including interest, income, capital gains and dividends are completely tax-free. When opening a TFSA account you’ll be able to invest in equities, a fixed income account or both. That means you’ll have options.

If you don’t mind the risk, you can invest your money in the stock market through exchange-traded funds (ETF’s) or put your money in a more traditional account. Most major banks offer TFSA accounts that are less risky and act as long-term savings accounts. These investment accounts offer reasonable interest rates of about 3% – 5% depending on the bank. However, if you invest your money with a TFSA you may see a return of 7% or higher. Investing your money is the riskier option, so make sure you do your research and understand the investment.

A TFSA is limited. You will only be able to invest R36 000 tax-free per year. That includes all the money you deposit plus any interest, dividends or capital gains earned. If you exceed the R36 000 annual limit you will be taxed the normal 40% on any additional capital gains earned.

You will also be limited to a R500 000 tax-free lifetime limit. Which means if you max out your annual limit each year you’ll be able to benefit from the TFSA for 13 years.

You should aim to max out your TFSA each year. You’ll need to save R3 000 per month if you want to max out your TSFA each year. If you manage to max out your account you’ll have R500 000 in just 13 years. And best of all, you’ll have all this money tax free.

Retirement Annuity

A retirement annuity (RA) is an investment vehicle that will help save for retirement. Some companies offer their employees a pension or provident fund which is great. If your company offers this option it is a great idea to take advantage of this. However, if your company does not offer this benefit, an RA is a great option.

A retirement annuity is a great way to invest your money tax-free. You may invest up to 27.5% of your taxable income in a RA or be limited to R350 000 per year. You will also not be charged any capital gains tax or income tax on the returns on this investment.

You will be required to withdraw one third of your total investment once you retire, or from the age of 55 years old. The first R500 000 of this withdrawal will be completely tax-free as well.

Retirement savings in your 20’s

Thinking about your retirement may be the last thing on your mind during your 20’s. Especially if you have student debt to pay off. However, the sooner you start putting money towards your retirement savings account the better your retirement plan will be.

Some companies contribute towards their employee’s retirement accounts, making it much easier to save. However, if your company does not offer this benefit, you’ll have to do your own research and find a retirement savings account that best suits you.

Saving for retirement from a young age means your money will grow a lot faster. That’s because compounding interest will help you grow your money. The more money you add to your retirement account, the greater the interest will be and the greater your returns will be.

If you’re not earning enough money in your 20’s to set aside some cash for your retirement, don’t stress. You have at least 40 years to save up a decent amount. Use the time that you have during your 20’s to plan your retirement savings.

Retirement savings in your 30’s

You should have at least 1 – 2 times your annual salary saved up during your 30’s. To achieve that you’ll need to save 10% – 15% of your monthly salary.

Once you hit your 30’s you may have a lot more responsibilities. You may want to buy a house, start a family, buy a nice car etc. However, all this responsibility means you’ll have to tighten your budget. By paying more attention to your spending habits, you’ll be able to push more money towards your retirement account. Making it easier to meet your retirement savings goals further down the road.

Retirement savings in your 40’s

During your 40’s you should aim to save 3 – 4 times your annual salary. This may sound like a lot, but you’ll be building on what you’ve saved up during your 20’s and 30’s.

How can you achieve this goal?

Start by pushing as much money into your retirement account as possible. If you get a raise add that money to your retirement account. Once you’ve paid off any debt, add the money you used to pay off the debt and add that to your retirement account. Add any extra money you have to your retirement.

Saving up for retirement should be a priority in your budget at this point. Your retirement savings should be included in your monthly budget like your mortgage, utilities, and food.

Retirement savings in your 50’s

Retirement is around the corner once you’re in your 50’s, it’s time to get really serious about saving if you haven’t done that yet. You should aim to save at least 6 -7 time your annual salary during your 50’s. That may seem like a very ambitious goal but meeting that goal will set you up for retirement.

If you’re no where close to your savings goals, it’s time to have a serious look at your monthly expenses and see where you can cut costs. You only have 10 to 15 years before you’ll need to retire so you’ll have to make the most of these last years.

Retirement savings in your 60’s

Now it’s you’re in your 60’s you’ve reached the home stretch. These are your last years to reach your retirement savings goals, so make the most of it. You should have a decent amount saved up that you can add to.

During these years you should add the finishing touches to your retirement account and plan what your retirement looks like in more detail. If at this point, and you’re you still haven’t reached retirement savings goal, find ways to earn extra money during these years. This will allow you to stay busy while earning an income and you won’t need to completely rely on your retirement savings.

By now you should have a clear picture of what your retirement will look like and how much money you’ll need during these years. Your budget should include any medical bills, monthly expenses etc. If you want to buy a beach house or travel the world your retirement budget should reflect this lifestyle.

Build your nest egg

No matter what age you are right now, you are never too old to start saving for your retirement. Start by creating a retirement plan for yourself and invest your money carefully. You don’t want to be in a position where you have no money to help you get through retirement. Remember to assign milestones for yourself that you should aim to achieve as you get closer to retirement.

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