Is R5 million enough to retire in South Africa?

Only about six in every hundred South Africans reach retirement able to carry on living the way they did while they were working. That figure gets quoted a lot, and the research behind it is fuzzier than anyone admits, but the gist is hard to argue with. Most of us get to retirement with less than we hoped. So when someone has actually managed to put away R5 million, the question they tend to ask is a fair one. Is it enough?

The honest answer is that it depends, mostly on two things you control less than you would like, the income you need and how long you live. But "it depends" is a cop out on its own, so let me give you the real numbers.

The short version

If you retire at 65 and you want your money to last about 30 years, R5 million can safely give you somewhere around R16,000 a month, in today's money, after tax. That is a comfortable, careful retirement for a couple who own their home and carry no debt. It is not a R25,000 a month, two holidays a year retirement. Draw at that kind of level and the money runs out while you are still very much alive.

Everything below is really just unpacking that one paragraph.

What R5 million actually pays you each month

The starting point is the rule you have probably heard, that you can draw about 4 percent of your pot in the first year and lift it with inflation after that, and have a good chance of it lasting 30 years. On R5 million, 4 percent is R200,000 a year, or roughly R16,667 a month before tax. After tax, with the larger rebates you get from age 65, you keep about R16,000 of that.

Here is how a few round numbers compare, all drawn at that same safe 4 percent from age 65.

You can push the income up by drawing 5 percent instead of 4, which turns R5 million into closer to R20,000 a month, but you are trading comfort now for a real chance of running short later. More on that in a moment.

A living annuity, or a guaranteed income for life?

There are two ways to turn that R5 million into an income, and the choice matters more than most people realise.

A living annuity keeps your money invested and lets you choose your income each year, anywhere from 2.5 to 17.5 percent. It is flexible, and whatever is left when you die goes to your family. The catch is that the risk sits with you. Draw too much, or hit a bad run of markets early on, and you can outlive it.

A guaranteed annuity, also called a life annuity, does the opposite. You hand the R5 million to an insurer and they pay you a set income for the rest of your life, however long that turns out to be. An inflation linked one even keeps pace with prices. On R5 million that might be somewhere around R23,000 to R25,000 a month after tax, more than the living annuity's safe 4 percent, because the insurer is pooling the risk across thousands of people. The trade is that the capital is gone. Nothing for the children, and no flexibility if your life changes. Worth knowing too, a life annuity pays a woman a little less than a man of the same age, because on average her money has to last longer.

Plenty of retirees split the difference, buying a guaranteed annuity to cover the essentials, the lights, the food, the medical aid, and keeping the rest in a living annuity for flexibility.

How long will R5 million last?

This is where the wishful thinking usually creeps in. Say you decide R5 million should give you R25,000 a month to spend. To actually put R25,000 in your pocket after tax you have to draw about R29,500 before it, which is roughly 7 percent of your pot in the first year. At that rate, on sensible return assumptions, the money is likely gone by around age 82. If you stopped working at 65, that is a frightening place to be, because plenty of people are still going strong at 82.

Drop the drawdown to 5 percent and it stretches into your late eighties. Hold it at 4 percent and a balanced pot should see you through a full 30 years. The lesson is blunt. Whether a R5 million pot lasts comes down mostly to how hard you draw on it, and anything above about 6 percent is the danger zone.

If you want to see this for your own number rather than take my word for it, the retirement calculator has a "will my money last" tab. Put in R5 million and the income you want, and it shows you the exact age your pot is likely to run dry, after tax.

What fees quietly do to your R5 million

Here is something the glossy bank calculators tend to leave out. Fees come off your return every single year, and over a long retirement that compounds into serious money. The gap between paying 1.5 percent a year in total costs and paying 0.7 percent does not sound like much. Over 30 years it can be years of income. On a R5 million pot, shaving a single percent off your fees can be worth more than an entire year's drawdown. It is one of the very few things in this whole exercise you control directly, so ask your adviser, in rands, exactly what you are paying. It is a fair question and a good adviser will not flinch at it.

Is R5 million enough if you retire at 55 or 60?

Everything above assumed you stop at 65. Retire earlier and the same R5 million has to do more work, for longer, with no help yet from the state grant or the bigger over 65 tax rebates.

Retire at 60 and your money needs to last about 35 years, so a safe drawdown drops to around 3.4 percent, which turns R5 million into roughly R14,000 a month rather than R16,000. Retire at 55 and you are planning for 40 years, where a safe rate is closer to 2.75 percent, and R5 million realistically supports about R11,000 to R12,000 a month if you want it to go the distance. The pot that feels comfortable at 65 starts to feel tight at 55. And do not lean on the Older Persons Grant to fill the gap. It is about R2,400 a month, it only starts at 60, and it is means tested, so a R5 million retiree will not qualify for much of it, if any.

So, is it enough?

For a 65 year old who owns their home, has no debt, and is content with around R16,000 a month, R5 million is enough, and that already puts you ahead of most of the country. For someone who wants R25,000 a month, or who wants to stop at 55, or who has a bond and a medical aid bill climbing faster than inflation, it probably is not, at least not on its own.

The trouble with a single number is that "enough" is personal. The R5 million that buys one person a relaxed retirement leaves another short by their early eighties. The only way to know which one you are is to run your own figures, your age, the income you actually need, the fees you actually pay.

That is exactly what our retirement calculator is for. Put in R5 million, or whatever your number is, and it will show you the income it supports after tax and the age it is likely to run out, in about a minute. While you are planning, it is also worth checking what your savings really earn after tax with the savings interest tax calculator. A rule of thumb is a fine place to start. It is a poor place to stop.

Quick answers

How much income does R5 million give per month in South Africa?

Drawn safely at about 4 percent a year from age 65, roughly R16,000 a month in today's money, after tax. A guaranteed life annuity can pay more, around R23,000 to R25,000 a month, but you give up the capital.

How long will R5 million last in retirement?

Draw about 4 percent a year and a balanced pot should last around 30 years. Draw R25,000 a month, which is closer to 7 percent, and it is likely gone by about age 82.

Is R5 million enough to retire at 55?

It is tight. At 55 your money has to last around 40 years, so a safe income is only about R11,000 to R12,000 a month, with no state grant or over 65 rebates to help in the early years.

Is R3 million or R10 million enough to retire?

At a safe 4 percent from 65, R3 million gives about R10,000 a month after tax and R10 million about R28,500 a month. Whether that is enough depends entirely on the life you want to live.