How to afford the life you want after your last salary

You have a Pinterest board for your kitchen makeover, your trip to Italy or your ideal wedding. Why not create one for your retirement? What does your life look like 20 or 30 years from now? Will you have paid off your home? Will you have children depending on you and still living with you? Will you be able to travel abroad? How often will you replace your vehicle? Dream big and the more specific you are, the clearer the picture will be about how big the gap is between what you’ve saved and the life you want to live.

If there are just three words that people need to learn relating to saving, they are net replacement ratio (NRR). Knowing what this means is critical to ensuring that you have the life and lifestyle that you want when you retire.

In a nutshell, NRR is the expected pension that you will receive at retirement, reflected as a percentage of the last salary that you earned when you were working. It’s the calculation that indicates how much income your retirement savings will be able to create for you when you retire.

For example, if I earn R40 000 per month towards the end of my working career, and my replacement ratio is 50% (which means I have only saved enough to cover 50% of my predicted costs), my current retirement savings will be able to provide me with a retirement income of R20 000 per month. Basically, I’d have to cut my current lifestyle in half!

Know what your replacement ratio is – it’s specific to you. You need to know how much more you need to save to close the gap and have the life you want after retirement. It’s that simple.

It’s natural for young people to only consider what is important today. Most people think that there’s so much more that they can do with their money than save for retirement, especially when they’re trying to accumulate assets, like a car or house, or provide a good education for their children. But the consequences of not saving for retirement or saving too little could be dire.

Observe the people in your circle who have already retired. Who’s doing well? Who’s struggling to make ends meet? How do you think they got there? What could you do differently?

If you are already saving for retirement, good for you. But are you saving enough? The ideal replacement ratio is 75% or higher of your final salary earned, before you retire. If your NRR is 40% or lower, it is unlikely that you will be able maintain the lifestyle that you are accustomed to when you retire. Remember that your employee pension fund, on its own, may not be enough to sustain you when you stop working.

In addition to your pension fund at work, a retirement annuity (RA) and a tax-free savings account (TFSA), as examples, could go a long way in closing the savings gap. Also consider taking one of these out for your child. If your parents had done that when you were born, you could have been a lot further along your journey towards financial confidence.

South Africans are some of the most indebted consumers in the world. Of course, there’s healthy debt like a mortgage bond for your home or debt that is sometimes necessary such as vehicle finance. However, if you are using credit to finance a lifestyle you cannot afford – such as clothing, luxury items, or your social life – then you have unhealthy debt. This becomes a drain on your ability to save for anything – including retirement. It is important to remember that paying for something on credit entails forking out two (or sometimes three) times the actual cost. Minimise using your hard-earned money every month to service debt and credit.