A Guide to Saving Smart for Retirement as you Approach your 40s

Saving for retirement is a journey that spans your entire working life, and the importance of each variable that drives your likelihood of success changes to some extent as you age. Understanding these age-specific variables is crucial for a retirement strategy that adapts to your evolving financial landscape and life goals. As you enter your 30s and 40s, the emphasis shifts to understanding where you are relative to where you need to be and then increasing contributions, if necessary. In this article, we will again utilize our pre- and post-retirement tool based on The Big Picture from Investments Illustrated to delve into whether and in what ways the seven key variables can set you up for success in your 40s.

What matters as you approcah your 40s?

As you approach your 40s it is important to do a ‘pit stop’ on where you are relative to where you need to be, as you still have enough time to make the changes you need to improve your likelihood of success if you are falling short. The table below provides an ‘easy to use’ benchmark to check if you are on track.

Let’s revisit our first article’s base case, Mary. She is 40 years old and has been working for 15 years. She currently earns a base salary of R 1 million per year and has R 3 million saved up towards retirement. Based on the above benchmark, Mary should have approximately R 3.5 mil saved up as she is halfway through 10 and 20 years, i.e. halfway through 2 to 5 times annual salary required. Let’s assume her retirement age, starting capital and fees can’t be changed. Can the remaining variables the influence retirement success, can asset allocation and monthly contribution alone help her catch up?

The short answer is yes. Besides transitioning to a traditional multi-asset high equity option, we also assessed the effects of investing in a solution that maintains the maximum allocation to growth and direct offshore assets permissible under the investment regulations that govern retirement savings in South Africa, called Regulation 28. This portfolio will contain 75% equity, 15% property and 45% direct offshore exposure. We refer to this as a ‘max reg 28’ portfolio below. It is important for Mary to understand that with 20 years to retirement, she still has more than enough time to maximize the growth potential that a ‘max reg 28’ portfolio can offer.

Increasing her exposure to the ‘max reg 28’ level growth assets will increase her likelihood of success from 60% to 80%. Thereafter, she can take her likelihood of success up to nearly 90% by increasing her contribution from 15% to 20% of her annual salary. This equates to about R4 200 per month or R50 000 a year more in contributions. If she can’t afford to deduct an additional R4 200 from her salary every month, she could consider paying this additional R 50 000 per year from a bonus or 13th cheque payment.

Asset allocation again stands out as the lever that is easiest to pull AND having the most material impact on the success-dial and can again be labelled a ‘no-brainer’.

So, what matters most?

The path to successful retirement requires impactful investment decisions and worthwhile sacrifices. The sweet spot, or variables to focus on first, are asset allocation and annual cost. This is good news for investors because it won’t cost them anything tangible. However, it will require discipline to stay invested when markets are down. Whether you’re growing your savings or preserving them post-retirement, mastering these aspects can significantly impact your financial comfort. In the next article, we delve into the nuances of at what age to focus on which variables in the pre-retirement journey.