Sustainable Lifestyle Level

By Johann de Villiers and Elze-Mari Roux

Stellenbosch University Department of Business Management

We have recently published a paper titled Reframing the Retirement Saving Challenge: Getting to a Sustainable Lifestyle Level in the Journal of Financial Counseling and Planning (subscription required). In this paper we develop a new approach to decide on the appropriate retirement savings rate. Instead of asking what income you will need in retirement and then determining what you have to save until retirement to provide this income, we suggest a different approach. You should focus on what you can afford to spend now while still saving enough to finance this same level of expenditure in retirement. The idea is that you should get used to this lifestyle level now that you will be able to sustain up to and into retirement.

We have developed a simple formula to calculate what your sustainable lifestyle level (SLL) is. You can either calculate this using the calculator below or you can calculate this yourself using the formula we provide later.

You must provide two inputs:

  1. The number of years until you plan to retire,
  2. How much you have already saved for retirement (expressed as your total retirement savings divided by your annual salary).

Your financial planner must provide two inputs as well:

  1. The expected real annual return on your retirement savings,
  2. Your expected real drawdown rate (or annuity rate) in retirement.

We have entered a conservative real rate of 4% per year for both of these in the calculator. Please feel free to change this. We recommend consulting a financial planning profession to ensure that the rates used are appropriate for your individual circumstances.

SLL Retirement Calculator

years
times
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If you prefer you can use the formula to do the same calculation:

$$p = {1- {a_z(1+r)^{(z-k)}{RET_k\over SAL_k}}\over 1+a_z[{{{(1+r)}^{(z-k)}-1}\over r}]}$$

p represents the proportion of you salary that you need to save towards retirement in order to support a sustainable lifestyle.

$$(z-k)$$

years to retirement

r

real annual investment return on retirement savings

$$(a_z)$$

the real annual rate of income from a life annuity received during retirement from the accumulated savings at retirement

$$RET_k\over SAL_k$$

retirement savings already accumulated expressed as a multiple of an annual salary

To derive this formula we have assumed the following:

Your income will remain constant in real terms (increase at the rate of inflation) over your working life. This means that you will have to repeat this calculation if your income changes at a different rate, for example when you change employment or receive a larger salary increase.

At the sustainable lifestyle level your income before and after retirement will be the same. The tax payable before and after retirement will be similar. On an after tax basis you will be in the same position before and after retirement. We have therefore not explicitly provided for tax in our model.

If you are interested to see how we derived this formula, you can download it.

In the media

Reference

De Villiers, Johann U. and Elze-Mari Roux. 2019. Reframing the retirement saving challenge: Getting to a sustainable lifestyle level. Journal of Financial Counselling and Planning 30(2): 277-288.

Disclaimer: The use of the calculator or formula on this website is not and should not be construed, in any manner whatsoever, as the receipt of, or substitute for personalised individual financial advice from a financial planning professional.

Subject to a Creative Commons Attribution 4.0 International License.