How much money is enough?

A simple way to understand how much money you need to retire

5 min readJun 18, 2021

I’ve never really had a clear picture of how much money I needed to save for retirement. Heck, a few years ago, retirement was of zero concern to me — and to no surprise: The idea of retirement to a millennial like myself was unattractive and unmarketable, it didn’t shout “Instagrammable!”.

There’s nothing I can say to make retirement sound more attractive. That’s not the point of this article. The point of this article is to help those who have decided that saving for retirement is important, to create an easy mental model for how much money they need to retire.

Step 1: Figure out your expenses at retirement

The first thing to figure out when thinking about retirement, is what your expenses will cost you at retirement.

When we retire, we lose income from our day jobs, and we have to move away from living from our paychecks, to living from our accumulated wealth. The model shifts from: “Does my paycheck cover my expenses?” to “Does my wealth cover my expenses, and will it do so for the rest of my life?”

A scenario: 30 year old Jane

Let’s imagine Jane, a 30 year old woman planning to retire at age 55. Her current expenses cost her R20 000 per month: R10 000 on rent + R5 000 on groceries + R2 000 on travel + R3 000 on leisure. What we need to figure out here is what Jane’s expenses will be by the time she’s 55.

Let’s imagine that by then, on one hand, she’s paid off a house and doesn’t need to pay for rent, and her travel costs decrease since she doesn’t go out as often. On the other hand, she’s paying more for health and welfare — so in today’s terms, her expenses would be: R1 000 on house maintenance + R5 000 on groceries + R 1 000 on travel + R1 000 on leisure + R1 000 on health. These would add up to R9 000.

If these expenses would cost her R9 000 today, to figure out how much they would cost her in 25 years time, we can apply inflation to expenses for these 25 years, using a future value equation:

If we assume that all of her expenses grow at an inflation rate of r=5% every year; her PV=R9 000 monthly expenses, will cost her R30 477 after n=25 years.

Step 2: Figure out how much income you need every month

If Jane’s monthly expenses at retirement will be R30 477, then her net income needs to be at least that amount. Her gross income might need to be higher, since not even old age can save you from the iron fist of government and tax.

If we assumed that her effective tax rate was 10%, then her minimum gross income to cover her expenses would need to be R33 863.

Step 3: Get to your answer!

From this point, understanding how much wealth you need to start with, is a matter of financial equations:

If I have PV amount of wealth in rands, that grows at an interest rate, i, every year; and I withdraw PMT every month, where this withdrawal grows by inflation, g, every year. What should the value of PV be, for a period, n, of 45 years (assuming she lives till 100)? This is answered by the equation below:

If we annualise everything for simplicity: An annual PMT of R33 863 x 12 = R406 356. If we assume that our wealth will continue growing at i=6% after retirement, and our expenses will increase by g=5% every year (our growth outperforms inflation by 1%).

Our PV, the amount we need to retire with, equals to R14 110 245.

This is hard, I wish there was an app for this

Clearing up the assumptions

While this method gives you a decent baseline to base your retirement savings assumptions from — the future is never this predictable. Your retirement savings are always susceptible to suffering from a big emergency, or a market crash (as we saw with the pandemic). Always use your discretion.

Comparing with the 4% rule

The 4% rule is a rule of thumb that advisers have historically suggested to determine how much a retiree should withdraw from their savings every year — in a fashion that would maintain a healthy account balance throughout retirement.

It suggests that withdrawing 4% of your account balance every year is a safe bet, as these would primarily withdraw from dividends and interest.

Important to note here that this is not financial advice, here’s a great article I found on retirement income from an adviser.

From our estimate of R14 110 245, 4% of this would equal R564 409, which has a greater withdrawal allowance than our calculated gross income of R406k (which works out to be a withdrawal rate of 2.9%). It checks out!

Safety isn’t a guarantee

From looking at the numbers, it’s quite obvious that more savings are better; as they allows us to support more expenses. While these methods give us a good baseline understanding. Anything can happen.

Jeepers, if only there was an app to help me with these calculations

You’re in luck! There is. A few months ago, I created Simfolio, an app to help you get a much better view of your investment portfolio. Inside the app, there’s a retirement calculator — that gets better by the day.