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Why it’s a good idea to start saving up towards your retirement now

It’s said you would need at least 70% to 75% of what you earned at the peak of your career to maintain your lifestyle at retirement.

Retirement is something that’s easy to put off and may seem like a goal too far into the future to be of importance to you now.

While millennials are more focused on shaping the economy and discovering the world of technology, their priorities are very different to that of an older-generation individual. With the many expenses they face such as paying rent, student loans, car repayments, bonds and just everyday living expenses, there is no wonder that saving for retirement can fall off the list of their priorities. We tend to fall victim of instant fulfilment from spending rather than saving for our future needs and requirements. 

Here are some critical considerations on why it is vital to save for retirement now:

  • Will you have adequate funds to provide the kind of retirement lifestyle you envisioned?

You have spent your life working hard and when retirement comes, one wants to still travel and enjoy their golden years without having to worry about cash flow. Many people would agree that you would need at least 70% to 75% of what you earned at the peak of your career in order to maintain your lifestyle at retirement.

Your retirement will be more enjoyable if your financial plan is structured in such a manner that fits your lifestyle to ensure that you are able to enjoy it and protect the assets you have worked hard to acquire during your lifetime.

  • If you had missed the boat of saving would the old age government grant be enough?

The current maximum amount that you can receive from the South African government old age grant is R1 780 per month, and if you are older than 75 years you’ll receive R1 800. 

I am sure we would all agree that this will not allow you to live the lifestyle you would have grown accustomed to while working. The reality is that some people have turned to the government grant, as they haven’t budgeted enough towards their retirement savings for it to last throughout their retirement years. 

  • Unanticipated future expenses

While saving for retirement, it is important to consider the following:

  • Have you saved enough to receive an ongoing income during your retirement years?
  • Do you have an additional savings pocket to address any unexpected expenses that may arise?

Some unexpected expenses that may arise during retirement include:

  • Outliving your retirement savings: do you have extra invested to assist if your annuities run out?
  • Unforeseen medical procedures: it’s important to have medical savings or have funds to pay for medical aid premiums.
  • General maintenance expenses on the assets you may own, car repairs, household upkeep etc.
  • Your family may run into trouble: would you be able to assist in some way?

 

  • Impact on your family at retirement

Most people would agree that you would not want to be a financial burden on your family at retirement. During the years of bringing up your children it is important to lead by example and show the importance of saving in their younger years. At retirement you do not want to be in a position of being dependent on your family. You would rather want to be in a situation where you are able to help them if need be.

At retirement you can elect beneficiaries on certain products that you enter into. After having spent years saving for retirement, there is still that comfort in knowing that if something was to happen to you early in your retirement years, your family and your children will benefit from the retirement money saved, as long as they are elected as beneficiaries.

  • Saving for retirement has a tax benefit

According to Allan Gray, here, contributions to a retirement funds are tax deductible, within certain limits. “The maximum tax deduction you may make in a tax year is limited to the greater of 27.5% of taxable income or remuneration from your employer, subject to an annual ceiling of R350 000,” it states.

What this essentially means is that you can pay less income tax if you are contributing to a retirement fund.

Practical example of the benefits of investing from a young age

Let’s assume you contribute R1 000 per month to a retirement fund and the investment is yielding a return of 6% per annum. The table below illustrates the difference in market values at retirement age (55) assuming different starting ages:

Starting age

Market value

25

R1 078 677.34

30

R752 469.19

35

R508 707.48

40

R326 554.56

45

R190 439.29

50

R88 726.05

 

Saving from a younger age can have a big impact on your retirement days. 

Alternative investment vehicles 

Investing into a retirement fund has certain restrictions depending on the investment product such as:

  • You can take up to a maximum of one-third in cash at retirement age. The remaining amount would need to be transferred to an income-generating annuity.
  • Only the first R500 000 taken is cash is tax free at retirement, provided you did not receive any previous severance packages or withdraw from a retirement product previously.

This should not deter an individual from investing into a retirement fund, as it does have its benefits. The aim should be to save for your retirement days. There are options with which to do so, including alternative investment vehicles such as unit trusts, tax-free savings accounts, offshore investments and many more.

Changes in lifestyle 

It has become evident that more people are considering emigration, due to the political turmoil in South Africa.

Should you be considering emigration but have already started saving towards your retirement, please take note of the following which applies on formal emigration:

  • You are able to withdraw the full value you have accumulated in a retirement annuity and preservation fund.
  • However, please note this withdrawal does have a high tax implication, and therefore a retirement product would not be the best way to save should you be thinking of emigration.

Over the years the idea of retirement has changed. In the past, people retired at age 65 and then would basically sit back and not do much and pass away at around 70. Nowadays, 70 is still relatively young due to advances in technology and medical research. Life expectancy should be taken into consideration when one thinks about saving.

Conclusion

In our opinion, building up savings for a comfortable retirement should be right on top of one’s priority list. Saving money can be a challenge for many but one should think of it as the building blocks to a pleasant future. If you are under thirty or even in your forties, it’s not too late to start saving for your retirement now. It is recommended that you seek the advice from a professional financial advisor, who will provide a retirement plan that will guide you in the right direction towards your retirement goals.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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