How Much Millennials Need To Save To Secure R50 Mil. For Retirement

If you’re still not sure, the term ‘Millennials’ refers to the generation spanning those who were born to those who graduated high school in the year 2000. So, roughly, the Millennial label covers 16 to 34 year-olds. They’re the children of the Baby Boomer generation. But, the only thing they have in common with their parents is a lack of adequate retirement savings.

Millennials Like Money, But They Don’t Have Much Of It

They’re the biggest generation since the Baby Boomers and the largest generation in US history. They make up 20% of the South African population and their median age is quarter-life-crisis, 25.

It’s not surprising that Millennials, who were eye witnesses to the detrimental effects of the 2008 financial crisis on their parents, have a valid uncertainty towards the stock market. They are also faced with already being in debt by the time they receive their first salary. Study loans make up a large portion of this debt. But, the easy availability of credit from financial and retail institutions compound the issue.

In SA, Millennials are also a generation of young professionals who face the added task of taking financial responsibility for more than one household. This is due to only 6% of South Africans currently being able to retire comfortably.

It’s no wonder the studies by the University of Michigan, “Monitoring the Future,” and UCLA’s American Freshman survey, showed students are increasingly considering wealth a very important attribute. The data revealed that, where 45% of Baby Boomer students (surveyed between 1967 and 1985) considered wealth of high importance at the time, 75% of Millennials now consider this to be true.

So, How Much Does The Average 25 Year-Old Need To Be Saving For Retirement?

In 2014, PayScale conducted a survey on the salary information of 126,000 South Africans, with up to 10 years working experience. Assuming that the youngest employees enter the working world at 21 (after graduating from university), an average 25 year-old would have between 1-4 years work experience.

Data collected from the survey revealed that South Africans can expect to earn an average annual salary of R208,000. This, once they’ve been working for 1-4 years.

Based on this figure, the average 25 year-old in South Africa earns close to R17,500.00 per month. We asked Trishalan Munsami, a financial adviser with Liberty Life, to calculate what he/she would need to earn to retire with this same income at 65.

Munsami explained that to work out how much you would need to fund a retirement, you’d need to know how long you’re expecting to live post retirement.

“We work on an average age of 90, so the funding term in this case would be 25 years.”

The general rule of thumb, to date, has been to save towards 60% of your current annual salary come retirement. Munsami says people are generally quite happy to save for their full shortfall to maintain their current lifestyle or better it.

“If a 25 year-old male, with the current income of R17,500.00 wants to retire in 40 years and maintain his current income (in future value) for another 25 years, he would need to contribute R5,759.00 per month to a retirement savings vehicle,” says Munsami.

That’s a 32% chunk of the salary. 10% above what the 2015 Nerdwallet report found to be a sufficient allocation.

This is factoring in an average expected investment return of 10% annually. Plus an expected inflation rate of 7%, and a premium escalation rate of 5% per annum. We asked him what that would equate to in future value – a lump sum. The response? A jaw dropping R57,5 million.

Christo Davel, 22seven CEO, explains that where debt and retirement are bidding for priority status in your budget, the question shouldn’t be one or the other. 

“The practical solution is to find money. We believe that there is almost always some money to be found … it may be R100 a month or R1,000. Once you know where it is, then you can think about the ‘debt or retirement’ question practically.”


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