How much does a millennial need to save to retire with R6million in today's terms?

Alex Cook, CEO of GCI Wealth.

Providing for a secure and pleasant retirement is no mean feat. Today’s Millennials, who are at the start of their careers, should begin investing now.

In a recent article on Huffington Post, Paul H. Irving, Chairman, Milken Institute Center for the Future of Aging and Distinguished Scholar in Residence at the USC Davis School of Gerontology, asks “Are Millennials Ready for a 100-Plus Life?” He argues that people who are going to live even longer lives will need to take steps now to ensure that they benefit from that experience. He lists a number of things to do; among them, to prepare for lifelong learning and working, lay the foundations for good health and so on. The one I want to focus on is Save and invest for the long term.

After all, without sufficient income, a long life is not likely to a pleasure.

The best place to start is with an understanding of what the challenge is, and what steps need to be taken. Some basic calculations will help. Assume an age today of 23, and a projected retirement age of 63 in 2057. The variable would be the desired income at retirement. If, for example, it is R24 000 per month in today’s money, that would translate into capital of R6 million at current values – a frightening R61 million in 2056 based on the consumer price index plus 6%. In this scenario, the individual would need to start investing R2 300 a month now, and increase the amount by 10% a year.

Of course, a higher income – and many would want more – would mean a higher monthly investment.

To appreciate the wisdom of starting now, consider the position of somebody who is 33 rather than 23, and wants to retire at 63, which would be in 2047, also with a monthly income of R24 000. The capital required in today’s money remains R6 million, but the figure in 2047 money is much lower than in the previous example – R35 million as opposed to R61 million. However, the real issue is that the older individual, with fewer years to build up the capital required, would need to put aside R4 800 per month in the first year, with a 10% escalation.

Of course, these are basic scenarios. Smart individuals will take additional steps like developing a second income stream and making investments that yield higher returns, and so on. Some people will also benefit from windfalls, such as an inheritance.

It’s a sad truth that already the majority of South Africans do not have the financial resources to fund a secure and pleasant retirement – I estimate that more than 89% of retirees are underfunded. In order to maintain their desired lifestyle, they deplete their capital, and thus effectively bank on dying before it runs out completely. That’s always been an extremely dangerous gamble, and increased longevity means the odds of getting it right are even more unlikely! Of course, Millennials will have much longer working lives, but the inescapable truth is that it’s not too early to start saving now.