This question was posed recently by the US “Money” magazine. In their estimation and as a broad rule of thumb, we should aim to retire on 80% of our final income. What is more we should expect no more than 4% per annum of accumulated capital by way of income at retirement. This means that for a husband and wife earning, say, R500 000 per annum prior to planned retirement, they will need R400 000 to live on post retirement. Assuming a draw- down of 4% on capital, this means their accumulated income producing retirement assets will need to be R10m. Of course that has to be adjusted for inflation based on the number of years to retirement.
Here in SA, the situation is much the same. Once again as a broad rule of thumb it is recommended that 4% to 5% be the ideal drawdown income levels. Regarding retirement planning here, compared to say the US, there is one significant difference and that is the rate of inflation. Whereas in the US inflation is 1.2% pa, here in SA it is approximately 6% pa.
This has a significant effect on the net investment returns needed to sustain income post retirement. In the US the net return needed to give an inflation adjusted drawdown of 4% is 5.2% (4%+1.2%). In SA it is 10% (4% + 6%). A retiree in South Africa therefore needs almost double the return on his investments compared with someone living in the US to sustain his lifestyle post retirement.
That’s inflation for you!