Cut these expenses to reach your retirement income goal

Published on 28th July, 2021 at 05:43 pm

The SA retirement industry norm is to target a replacement ratio of 75% of your current pre-tax income to retire comfortably, bearing in mind that retirement income goals are unique to every individual. Find out why it’s important to have a retirement income goal, and how to reduce your living expenses to achieve yours.

Plan with the end in mind

What do you envision for your retirement? Will you travel? Provide support for your grandkids? Learn a new skill or hobby? This is a key consideration for you to be able to accurately determine the monthly income you would need to sustain your lifestyle and realise your retirement goals when you are no longer working. “Retirement planning is the process to determine a retirement income goal, and what actions or decisions are required in order to achieve that goal,” says Linda Nel, a business development manager at Glacier by Sanlam. “The retirement income goal will vary from person to person and take a number of factors into account,” she adds. Working with a financial planner, the conversation should include an estimate of your income at and during retirement. Other factors to consider are life expectancy, and any current and future savings you would need to use to achieve your goal.

Confused by retirement planning jargon? We’ve simplified it for you, here.

Setting your unique retirement goal

Research suggests that we should aim to retire with a monthly income of 75% of our pre-tax monthly income earned in the years before retirement. But how feasible is this? Nel notes that there are lower financial obligations at retirement, which would theoretically make a 75% replacement of income achievable. The reality, though, she points out, is that the statistics do not paint a pretty picture, and are indicative of insufficient provisions made for retirement among South Africans. Taking a look at figures presented at the Sanlam Benchmark Symposium 2019, just over half of South African retirees cannot make ends meet, while 33% don’t have the funds to cover medical expenses.

While this 75% replacement ratio should provide a comfortable retirement, there are nuances. You are unique, so understanding your personal retirement income goal depends on the lifestyle you envision. “Questions you can ask yourself include where you’d like to live, what type of lifestyle you’d like to follow, how much travelling you’d like to do, and so on,” says Werner Vlok, a business development manager at Glacier by Sanlam. “The more practical questions relating to what your healthcare costs could be are also important to ask,” Vlok adds.

Once you know the answers to these questions, it’s time to put a rand value to them and see how this fits into a retirement budget i.e. the budget you will use when you are in your retirement years. “Once you know your expenses, you then have a goal that you can plan and work towards to save enough for a happy retirement,” says Vlok.

Use this retirement savings tool to find out how much you need to put away each month to reach your retirement savings goal.

Can you make your dream retirement a reality?

“Your retirement income goal is highly personalised, taking into account both financial and non-financial needs,” says Nel. “A person who enjoys an expensive hobby and expects to continue pursuing this during retirement may well have a far higher retirement income requirement and will consequently require a higher savings accumulation pre-retirement,” she continues. If this means having to cut down on some expenses to be able to afford larger contributions to your savings, it is better to start sooner to allow compound interest and time to work in your favour.

Stuck in an emergency, you may be tempted to use your retirement fund to access cash. Find out why this is not a good idea.

Cutting out the right expenses to enjoy real savings

Cutting out a daily coffee or snack purchased on the go here and there does help you save, but Vlok says that if you want to take your expense-cutting seriously, you need to start looking at the big-ticket items first, like your car and house. Downsizing to a more affordable property or other living arrangement could release funds that can significantly boost your retirement savings. Trading in your current wheels for a more economical car can not only reduce your fuel spend, but your car insurance too. “Thereafter, look at the regular, recurring expenses like insurance, bank fees and subscriptions to make sure you have a competitive rate and are not overspending,” says Vlok.

And avoid giving into the temptation of spending that newly available cash on other flashy items. Here’s where you need to be disciplined: “Once you have managed to cut some of these expenses, it is very important to capitalise on this by actually saving that amount on a monthly basis by increasing your investment debit order by the amount saved,” says Vlok.

Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are Licensed Financial Services Providers.

Use this calculator to find out how much you need to put away each month to make your retirement income goal a reality.