HOW MUCH DO I NEED TO RETIRE SAFELY?

In the previous post, “When Can I Retire?”, I made the case that retirement is not necessarily tied to a specific age or a minimum bank balance. I explained that a working person should first aim to reach the milestone where their monthly expenses are lower than their monthly income. From there, the monthly savings should be invested effectively until you reach the next milestone: when your investment income is enough to cover your monthly expenses.

So how much is “enough,” and how do you calculate it? Here’s my easy and practical method:

Step 1: Calculate your current monthly expenses

In other words, what is the cost of your current lifestyle? Pull the past three months’ worth of bank statements (or more, if you have access) and record every expense. If you’re married, include your spouse’s expenses too. It’s crucial to track allexpenses, no matter how small. Include all accounts from which money is spent—covering debit orders, automatic payments, EFTs (electronic fund transfers), credit and debit card transactions, and cash withdrawals.

Also include amounts that are deducted directly from your salary before you receive it, like medical aid contributions, pension or provident fund deductions, income tax, mortgage payments, car loans, etc.

Consolidate these into a list of typical monthly expenses. It’s helpful to group them into categories—housing, transport, medical, groceries, clothing, and fixed services like phones, internet, streaming services, bank fees, etc. Consider dividing your expenses into Essential and Discretionary. This is especially useful because you’ll need to manage your expenses to stay under your income for the rest of your life—and when cuts are needed, discretionary expenses are usually the first to go.

While categories are helpful, what really matters is the total monthly amount you currently need to live.

Step 2: Project your future retirement lifestyle

Now imagine yourself as a retiree. Talk to people who have already retired and use your imagination to envision your post-retirement lifestyle. You now need to determine what your monthly expenses will be once you retire.

There’s a lot written about how much you need to maintain a reasonable standard of living in retirement. Some studies suggest between 85% and 115% of your pre-retirement income. In my own experience, however, people generally need less money per month after retirement. Here’s why:

• You’re no longer saving or investing for retirement.

• You (hopefully) don’t have a home loan or car repayments anymore.

• The kids (hopefully) are out of the house and no longer financially dependent on you.

• No more education expenses.

• No work-related costs like commuting or workwear.

• Lower income generally means lower tax liability.

• Many companies offer senior discounts.

• Lastly, and importantly, older people are less concerned with appearances or status and tend to need fewer material things.

• Many retirees also sell their large family homes and move to smaller, safer places—which could even generate a profit that adds to your retirement nest egg.

So, take your pre-retirement expense list and adjust it line by line to reflect what you expect to spend after retirement. Some expenses will decrease, others might disappear entirely, and some—like medical expenses—might increase. Yes, there is a bit of "crystal ball" work involved here, and that's perfectly fine. But this method—Steps 1 and 2—is at least practical and grounded in reality.

Step 3: Calculate the size of the retirement nest egg you need

Now that you know how much money you’ll need per month in retirement, you can work out how much capital you’ll need invested to safely draw that amount. Remember, after retirement, you no longer earn a salary. All your income comes from the investment pool you built up during your working years (Phase 2 of life).

Here’s the simple formula:
Multiply your estimated monthly retirement expenses (from Step 2) by 12 to get your annual retirement expenses.
Then divide that number by 0.04 (or 4%).

This will give you a rough estimate of how large your retirement fund needs to be to safely retire.

Example:
If you estimate you’ll need R30,000 per month after retiring:
R30,000 × 12 = R360,000 per year
R360,000 ÷ 0.04 = R9 million

So, you’d need around R9 million invested to safely retire.

Why 4%?

This is based on the well-known “4% Rule”, which suggests that if you withdraw no more than 4% of your retirement savings in the first year, and adjust that amount annually for inflation, your nest egg should last around 30 years. This assumes your investment portfolio is roughly 50/50 split between equities and bonds (more on that later).

The logic is simple: the less you withdraw annually, the longer your money lasts. The 4% Rule is not without criticism—it was developed by a U.S. financial advisor in the 1990s, and its relevance today, especially outside of the U.S., is often debated. But despite its limitations, the 4% Rule remains a widely accepted guideline—even in South Africa—and is often used to make decisions in complex financial planning scenarios.

If your investments are managed properly (again, more on this later), this rule of thumb suggests your R9 million should comfortably provide for R30,000 per month, adjusted for inflation, for approximately three decades.

What if you don’t have R9 million?

If, at retirement, your investment pool is less than R9 million, say R6 million, you’ll only be able to draw R240,000 annually (R20,000 per month) sustainably. That means you’d either need to:

• Lower your retirement lifestyle expectations,

• Or supplement the shortfall (e.g. R10,000 per month) through rental income, part-time work, or other sources.

Feeling disheartened by the R9 million example?
Thinking there’s no way you’ll ever get there?

Don’t give up—that’s not the end of the story.
Keep reading!