When you’re young and carefree, it’s easy to forget that you will age, and your retirement lifestyle will depend on how much money you have saved while you had the opportunity to do so.
As with anything concerned with saving and the future, the earlier you start planning the better, and the lower the costs involved. If, for example, you are 20-years-old and want to retire at 60, you have a full 40 years – or 480 paydays – to build a retirement fund. Wait until you are 50 and you just have 120 savings opportunities! Obviously, the earlier you start, the less you will have to put aside every month.
“Anyone earning a reasonable salary can build a comfortable retirement fund,” says Krisen Rabindra, National Sales Manager at Standard Bank Financial Consulting. “The reality, however, is that only around 5% of South Africans retire with the means to continue the lifestyle they built prior to retirement. The key to a secure future is saving every month. It’s also vital that your investments keep ahead of inflation, which increases yearly and eats away at the value of your money.
“Securing your future should begin the day you start work and be based on a debit order. You soon get used to a monthly deduction, which should be about 20% of your monthly salary after tax. Keep this level for 30 years, increasing your contribution every year to adjust for inflation, and you will have the funds to guarantee a long, happy retirement.”
Interest and returns on investment are constantly changing. As such, it’s advisable to use a financial planning professional to assist with developing a plan that covers a range of different investment options.
“An investment professional builds an investment portfolio based on a person’s age and needs,” Ms Rabindra says. “In this process, risk is considered. Making an investment that has a higher-than-average return, but also has a higher risk is fine when you are 30. But, these types of investments will be avoided if a client is near retirement age.
“An adviser will also ensure that a portfolio is balanced; it will consist of short-term, medium-term and long-term investments, so income is maximised and effective tax planning can be undertaken.”
Most South Africans fall short of their retirement ambitions, as they do not understand the basic guidelines for retirement funding. Some things that should be considered are:
Calculating the true value of your employee benefits – company pension or provident fund
Up to 50% of company pension funds pay out less in actual monthly take home cash than the government pension of R1 100 a month. People often don’t realise that the real benefits are made up of retirement funds, life insurance and disability cover. This means that only a part of monthly pension deductions go towards retirement savings. It’s important to get an independent assessment of your employee benefits.
Never ‘cash in’ your pension fund money when you change jobs
Avoid using pension pay-outs as windfalls to cover short-term expenses or buy luxuries. The problem is that tax is paid on these ‘windfalls’, and once it is used, it is gone forever.
Transfer pension funds with you to your new job, and you avoid paying tax and can use the money to boost your new pension fund. An adviser will also be able to assist in making alternative investments that will help build retirement funds.
Watch your personal budgeting
Include retirement savings in your budget and you will be financially secure when retirement looms.
To work out what you need to retire on, do the following sum:
Write down your present salary after tax.
Work out your probable earnings for the year before you retire. To do this:
· Increase your salary over the years you have to go before retiring by 10% a year to get a salary level for your final year of work.
· Work out what 80% of this final yearly salary will be.
· Multiply this amount by 20 (the average number of years people spend retired) to get the amount you will need for comfortable retirement.
“Although the final total may sound impossible to achieve, it can be done. All that’s required is a realistic budget and commitment. Add in the services of an adviser you trust and stick to a plan for a rosy future and a carefree retirement,” says Ms Rabindra.