Saving for retirement is the most powerful way to provide financial security and stability for your golden years. Not only that, but retirement savings can also provide you with an investment opportunity, whereby you can invest your retirement savings to possibly earn higher returns and grow over time. Importantly, retirement savings plans, such as pension funds and retirement annuities, offer tax benefits that can help you save more money.

Of course, knowing that you need to save for your retirement is one thing. It’s quite another to actually set about saving the correct amount. It can be disheartening to save for years only to come to the end of your working life and realise that you don’t have enough in the pot.

To help you out, we’ve laid out tips on how to determine how much you’ll need, as well as  various strategies you can employ to save for your retirement.

Calculate Your Retirement Target

Before you decide how much to save, it’s best to know what your target is. You can find a more detailed explanation on how to figure this goal out here, but in short, it’s vital to consider what you want your retirement to look like in terms of lifestyle, expenses, and other factors.

How Much You Should Save

Generally, financial planners rely on a replacement ratio to calculate how much you’d need to save. By and large, they use a replacement ratio of 75% which simply means that for every R1,000 earned before your retirement, you must aim to replace R750 as an income during your retirement. The 75% ratio is just a rule of thumb and your personal circumstances will influence the actual target replacement ratio. For instance, if you don’t have significant debts – like a home loan that you’re still paying off – you’re more likely to use the 75% ratio.

What this looks like in black and white, is that you’d save 17% of your salary over a period of 40 years (from age 25 to 65) to achieve a 75% replacement ratio. But the later in life you start to save, the higher this percentage will need to be to achieve the goal of 75%.

There are other approaches that you can apply. For example, there’s also the 15% minimum rule, which advises you to save at least 15% of your income annually over the course of your working life, so by the time you are 45 years old, you have already saved up to three times of your annual salary.

And then, there’s also the Rule of 300, which involves multiplying your current salary by 300. In this way, you can calculate an estimate of how much you may need to have saved to keep living the lifestyle you currently lead when you’re retired. Just keep in mind that this rule doesn’t consider inflation.

It’s also worth noting that this rule doesn’t take into account your actual financial circumstances, such as whether you have significant medical requirements or a home loan that you’ll still be paying off when you reach retirement. For these reasons, it is best to consult a financial advisor who may supplement this approach with another model that does factor in your personal circumstances.

It can be tricky to decide which strategy is the best, which is why it is so important to speak to a financial advisor who can help you decide on the strategy, plan around the effects and inflation, and decide on a realities retirement age.

Feeling informed?

We hope that this information helps you plan more intentionally for your retirement. Keep an eye out for other articles detailing how to calculate your retirement goals.

Don’t forget that AA Inform is home to a range of useful tools and resources, including our access to free property valuation reports, multiple through the AA Insurance Supermarket, and much more.