SHARES

Feeding your future: A recipe for retirement success

Saving for retirement isn’t a sprint but a marathon, and it’s important to plan accordingly and stay committed.

Ask anyone in formal employment who is within 15 years of retirement about their biggest asset. Their likely responses are “my house,” “my farm”, or perhaps even “my car”. Yet, few realise that banks and finance houses often hold a larger stake in these so-called assets than the registered owners themselves.

The truly savvy might answer, “My savings and pension money”, and the exceptionally astute may add, “My ability to earn an income”. These individuals, often with guidance from a competent financial advisor, understand the importance of ensuring this invaluable asset through your retirement planning journey.

ADVERTISEMENT
CONTINUE READING BELOW

In today’s environment, the pressure on retirement funds is significant due to extended lifespans. This is a key factor that everyone planning for retirement should be aware of. Reflecting these challenges, China’s principal legislative body recently ratified a measure to incrementally elevate the national retirement age, commencing on 1 January 2025. Specifically, the retirement threshold for men will ascend from 60 to 63 years. For women engaged in professional roles, the age will shift from 55 to 58 years, and for those in manual labour positions, it will rise from 50 to 55 years. 

Whether we like it or not, income comes from only two sources: people at work or money at work. Upon retirement, you effectively become employed by the capital you’ve built up over your working life. Just as you wouldn’t want to work for an employer with cash flow problems and the constant threat of bankruptcy, you wouldn’t want your retirement capital to be insufficient to provide financial security and well-being for the rest of your life.

According to the 2023 Retirement Reality Report by 10X Investments, based on the Brand Atlas Survey, South Africa faces a significant challenge in retirement preparedness. The report reveals that only 6% of the population is on track to retire comfortably.  

Retirement guideline

The exact amount required for retirement hinges on several variables, including anticipated income needs, adjustments for inflation, chosen retirement age, life expectancy, prevailing interest rates, and the decision to join a medical scheme after retiring.

As a general guideline, starting to save for retirement early is crucial. If you begin at the age of 20, you would need to save 15% of your pre-tax salary annually over 40 years to accumulate 20 times your salary by the age of 60. However, if you delay savings until the age of 30, you would need to allocate 30% of your pre-tax salary each year to retire comfortably at 60. Starting even later, at age 40, would require an extraordinary 60% of your pre-tax salary to achieve the same retirement goals by 60. 

Currently, with money market rates at about 8.25%, a capital of R1 million would generate roughly R6 875 monthly income. However, it’s important to remember that this income is subject to taxation at your marginal tax rates (note there is an allowable interest exemption portion), which could diminish your available funds. Additionally, with interest rates starting to decline, your interest income may decrease accordingly.

Savings strategy

A successful savings strategy involves committing to saving contractually over a long period and increasing contributions to match inflation. It’s not about constantly chasing the best returns but adhering to the basic investing principles. You need a simple plan and should start saving for retirement as early as possible. 

For example, a straightforward and effective strategy is to set aside 15% of your salary each month from the start of your career and invest the contributions into market-linked investments like global tracker funds or equity unit trust funds. Reinvest the income and avoid touching it until retirement. The miracle of compound interest will do the rest.

ADVERTISEMENT:
CONTINUE READING BELOW

Over a working lifetime of 30 or 40 years, this strategy can accumulate significant capital. Various investment vehicles like unit trusts, tax-free savings accounts, direct offshore platforms, endowment policies, and retirement structures can provide market access.

If you are a member of a pension or provident fund or have a retirement annuity and wish to boost your retirement savings, you can contribute up to R350 000 per year, which is fully tax-deductible from your gross income. It’s important to note that both you and your spouse can each benefit from these tax deductions individually, depending on your respective taxable income situations.

Similarly, tax-free savings accounts provide investors with the opportunity to contribute up to R36 000 each year, with the added advantage of tax-free investment returns. However, it’s important to note the lifetime contribution limit of R500 000. If you consistently maximise your annual contributions, reaching this cap will take about 13.8 years.

Summary:

Understand that saving for retirement isn’t a sprint but a marathon. Plan accordingly, stay committed, and get used to living on a budget that allows for necessary contributions. Let compound interest do its job, and you’ll be pleasantly surprised by what can be achieved over a working lifetime. Stick to your plan, and don’t get sidetracked by the noise around you.

Work with a good advisor and be disciplined about saving. If you struggle with saving regularly, consider a vehicle like a retirement annuity and discretionary investments and commit to regular contributions via a debit order, increasing with inflation.

Now is not the time to stop saving or procrastinate. Don’t fall into the trap of endlessly debating which product or fund is the absolute best for retirement while doing nothing about getting started. Often, the comparison isn’t about the best versus the good but about having something in place for retirement versus nothing. For more insights, visit us here. 

Was this article by Sean helpful?
54  

ADVISOR PROFILE

Sean Kelly

Parity Wealth Managers

COMMENTS   1

You must be signed in to comment.

SIGN IN SUBSCRIBE

or create a free account.

Free users can leave 4 comments per month.
Subscribers can leave unlimited comments via our website and app.

As soon as there’s growth on my Savings problems start creeping as a result one gets demoralized.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR
BTC / USD

Subscribe to our mailing list

* indicates required
Moneyweb newsletters
INSIDER SUBSCRIPTION APP NEWSLETTERS PODCASTS RADIO / LISTEN LIVE VIDEOS WEBINARS TRENDING
FOLLOW US: