Of course, R20 000 in 25 years’ time is going to buy you a lot less than it does today, so you should also be worrying about inflation.
The headline inflation rate cooled for the first time in five months, declining to 4,3% in July from 5,0% in June, but no one can really predict what it’s going to do next year, let alone 10 or 20 years into the future – other than saying with certainty that it’s not going to go away.
The way to account for inflation is simply to make sure that your monthly contribution to your retirement fund increases annually.
It must increase at a rate of no less than 5%, and preferably at the same rate as your annual salary increase – so that your retirement fund also keeps pace with your lifestyle.
Then, remember that your retirement fund is an investment, so your capital should also grow every month. If you are still in your forties, you can afford to weather some market ups and downs, so you can still buy into a more aggressive fund.
As you get closer to retirement, you will probably move your money into a more conservative fund. Either way, you can probably expect returns of somewhere between 8% and 12% annually.
This means that at the current rate of inflation, your investment will be growing at somewhere between 2% and 6% annually.
The fact that you are increasing your payments annually and that your capital is experiencing growth will mean that you will have a healthy buffer if the market dips, if you have any unexpected expenses after retirement or if you live longer than you estimated in your calculation.
The bottom line
As you can see from the sums, the sooner you start investing in your retirement, the better.
The longer you are invested, the more you benefit from compound growth.
If the necessary contribution is too daunting for you to start making right away, start smaller, bearing in mind that you can adjust certain factors in the future – like delaying the start of your retirement or reducing monthly expenses.
Don’t delay – start planning for your retirement, today!
