If you have reached your 40s, you may be wondering if you have saved enough towards your retirement.
By this stage, three out of four people have saved something towards their retirement. And so they should: they are hitting their peak earning years and they should be well on their way to reaching their long-term savings goals.
However, life has a habit of getting in the way – sometimes making it challenging to continue saving and reach one’s investment and financial goals. Often 40-somethings need to save for their children’s university fees, while also saving towards their retirement and perhaps even a house too.
This life stage may seem like the ideal time to switch into overdrive, but many people are instead puttering along in first gear. They save what they can, do their best and figure that they’ll sort out their finances later.
But, not having a financial plan is actually the same as having a really bad plan.
Your financial plan should be specific to your particular needs and requirements. It should look at your net income and assess your current level of debt. You need to set priorities for paying off any debt and saving for your different needs. The quicker that debt can be paid off, the more you can save for retirement. And all debt should be paid off by the time you retire.
When deciding how much to save and whether or not you have built sufficient capital, consider the following:
- Have an emergency fund, such as a money market fund, equal to about three months’ net salary, to provide a cushion in the event of a financial blow like we have seen now in lockdown.
- Save towards your children’s educational expenses as soon as you can, or plan to have access to funds such as the excess payments you made to your bond.
- Pay off debt with your excess monthly income and pay more every month than what is required in order to shorten the repayment term. As a guideline use one third of your excess funds to settle debt and two thirds towards your retirement.
- Maximise your company’s retirement fund contribution up to the allowable limit and maximise your tax savings by contributing a maximum of 27.5% of your taxable income towards your retirement funds and retirement annuities. Consider investing in a savings plan with offshore investment exposure to diversify your currency and country exposure.
- As a general rule of thumb, if you started saving in your 20s, you can get away with saving approximately 12% of your take-home pay. If not, then you need to increase your savings rate to about 20–25%% of your net income.
It seems that too few people have taken the necessary steps to prepare themselves to be financially secure in retirement but it is important to know that it is never too late to start.
Written by: Citadel Advisory Partner Christelle Louw