How much do you need to save for your retirement? It’s a common – and relevant – question, but the answer is complex and hard to come by. A one-size-fits-all rand amount won’t work because lifestyles, household budgets and standards of living vary from person to person. Getting to a reasonably accurate answer requires a full financial plan to be done but even that has limitations because any value makes assumptions about the future, which is inherently uncertain. Yet all of these excuses don’t prevent us from setting some guidelines. For this purpose, a concept called ‘multiples of annual salary’ is very useful.

‘As a retirement fund member who is still working, you are earning an income now and you will need to have an income in retirement,’ says Andrew Davison, Head of Advice at Old Mutual Corporate Consultants. ‘Multiples of annual salary provides a ballpark figure of the capital you will need at retirement that, when used to buy a pension, will work out at a pension that is similar to your pre-retirement salary. The benefit of the multiples of annual salary figure is that you are able to use it to check if you’re on track throughout your working career.’

Multiples of annual salary is therefore a useful indicator of the health of your retirement savings because, as Davison says, ‘it is tangible and meaningful for everyone; you don’t need to be an accountant to understand it’.

The value of knowing your multiple of annual salary

Davison recalls speaking to a retirement-fund member about this once. ‘She was a 48-year-old woman who had just changed jobs,’ he says. ‘She was moving from a small employer to a very employer. She’d never worked for a firm with a retirement fund, so she had never really saved for retirement, other than doing a little bit of investing of her own on the side.

‘Based on her current salary, we worked out how much she should have saved for her retirement by that point. When we calculated that number for her – it was about 3.7 times her annual salary. Although she was concerned about how low her actual multiple was relative to this target, the meaningful benefit of conveying this as a multiple was that she quickly understood her situation and it gave her something to work towards.

‘At the time she was way behind that goal, but she’s been diligently closing the gap ever since,’ says Davison. One thing to remember though is that the multiple isn’t static – it grows to reach the important multiple, which is the one you need when you reach retirement. For this female member, who is planning to retire at age 65, the multiple she will need is almost 10 times her salary, noting once again that this depends on a number of factors. In this example, the capital of 10 times will provide her with a guaranteed annuity that will pay a pension of 70% of her salary increasing by inflation.

Six important factors that will determine your pension

Working with multiple of salary, a good starting point is that South Africans should have saved around nine to ten times their annual salary at age 65 – closer to nine for men and closer to ten for women. But, Davison warns, a simple measure like this needs to be accompanied by a warning that the multiple that makes sense for one person might be different to someone else. This is because everyone’s financial situation is different.

The ballpark figure is just a starting point, but when it comes to something as important as your financial wellbeing for the whole of your retirement, it pays to have a good idea of how your situation and your choices – while you’re working, when you retire and during retirement – translate into the multiple that is right for you.

‘At Old Mutual Corporate Consultants, we pay attention to six important levers that drive better retirement outcomes. They include the level of your contributions as well as your fund’s investment strategy; whether or not you preserve your retirement savings when changing jobs; your retirement age; your pensionable salary relative to your cost-to-company salary; and the decisions you make at retirement such as the important choice of the kind of annuity you choose and the amount of any lump sum you might take.’

So, yes, if you arrive at your retirement date with nine or 10 times your annual salary stashed safely in your retirement fund, you have given yourself a decent chance of a comfortable retirement. But if your retirement age is 55 and not 65, then it’s back to the grindstone. If you want to take some of the capital as a lump sum, then you’re still a bit short. And if you would rather invest the capital in a living annuity than a guaranteed annuity you need to be careful of the level of income drawdown you take and whether it’s sustainable.

Having a good sense of the level of savings you need is critical and the multiple of annual salary is very useful in this regard. Paying careful attention to your own needs and the decisions facing you at retirement is also really important. ‘Fortunately, you’re not alone,’ says Davison. ‘A well-managed retirement fund will have an annuity strategy in place and will also make available a retirement benefits counsellor who can talk you through the choices you need to make and the options available to you.’ If you still feel like you need more information, it is advisable to seek the assistance of a financial planner.

Once you are clear on your target, it’s about working – and saving – towards it.

Visit Old Mutual Corporate Consultants to find out how we can help you and your employees to reach the best retirement outcomes possible.