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How much do I need to retire?

Ah, the million dollar question...with (possibly) a million dollar answer. As with most things financial, there’s no really simple way to answer this, but, by going back to basics, we think we can come up with something pretty useful.

What is retirement?

Before we get into the numbers, let’s get an understanding of what we mean by retirement.  If you Google-image search “retirement” you’ll eventually find a grey haired couple holding hands walking dreamily down a deserted beach.  Although it’s a nice stereotype, it implies that retirement is only something old people do, once they’ve completely stopped working.


We prefer to think of retirement as the point at which you no longer have to work.  This means you don’t need the income you get from working to live the life you want.  At this point, you should have other sources of income to cover your lifestyle, which don’t rely on you doing anything to earn it.  Generally, this is called passive income.


To start bringing in the numbers, you can retire when the following is true: Your passive income is greater than your living expenses.


This passive income must be sustainable over time.  For example, having enough cash to last you six months, but no longer, doesn't mean you can retire.  Your passive income should be expected to provide for you forever, after all you don’t want to outlive your money.


So, how much do you need to retire?

If you can retire when your passive income is greater than your living expenses, then the answer of  how much you need is directly tied to how much money you need to live.  If you have lower expenses and live a thrifty lifestyle, then you need less funds to retire. On the other hand, if you like to live large and want to continue this lifestyle into retirement, you will need more funds to retire, which may mean retiring later.


To figure out what your expenses in retirement are likely to be, take a look at your current budget and spend, and adjust from there.  First, remove expenses that wouldn’t apply in retirement.  For many people this may mean no more home loan repayments, and less (or no) spend on your kids, e.g. school fees, clothes and food).  Also, expenses related to getting to work may drop away.


Second, add expenses for things that apply in retirement.  For example you may want a more comprehensive medical aid, which costs more than you’re paying now. Ad-hoc medical expenses might also increase. You might dream of an overseas vacation each year in retirement, and if you do, you need to add it to your projected retirement expenses.


It is helpful if you know what you need to spend each year in retirement.  Don’t worry about adjusting it for inflation; pretend you’re retiring today, and figure out that annual spend need.


How much do I have to have saved?

Conventional wisdom says that you should save money every month into a retirement product, e.g. a retirement annuity or pension fund, and this money should be used to give you an income to cover your retirement needs.


While there are some tax advantages to providing for retirement in this way, it’s worth pointing out that this is not the only way to save for retirement.  For example, anything which gives you a passive income stream can be used to set you up for retirement:

  • A portfolio of shares which pays (and is expected to pay) dividends each year is a great way to provide for retirement, as those dividends are a natural passive income.
  • You may want to invest in a few properties which can earn you rental income.  Again, this is passive income.
  • You may even want to start a side hustle, or invest in a business and, provided you’re not working to make the business profitable (since this wouldn’t be passive income), income generated from this business could provide for your retirement.


But you probably just want to know how much you need in a single pile of cash so that you can retire, right?.  Well,  you’d work that out like this:


Step 1: Take the amount you worked out you’ll need per year. Step 2: Multiply that by 25. And that’s how much you need to retire. Step 3: Sit down, take a few deep breaths, and don’t panic.

If you’re very curious: Why must I multiply by 25?

Cos...mathematics.


If you have a large stash of cash, and that cash is well invested in an appropriately diversified portfolio (aka in lots of different things), you can expect that money to grow at about inflation plus 4%.


Your goal should be to spend only that 4% to cover your retirement expenses, because if you can manage that, then your cash stash is worth the same every year once adjusted with inflation. This means that you have greatly reduced the major risk of longevity because, even if you were to live another 50 years after this retirement point, your ‘pot’ of money should still be worth as much as the day you retired.


Some math wizardry says:  1 divided by 4% = 25, which is where the multiple comes from.  To test the maths.  Let’s assume you need R40,000 per year in retirement.  Multiplying that by 25 gives you R1 million needed.  4% of R1 million gets you back to the R40,000 retirement income need.


It’s important to note that the examples in this article are meant only to illustrate our point, and aren’t meant as financial, investment, or any other type of advice. For advice about your money, speak to a registered financial advisor.


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