Early retirement comes at a huge cost

The last five years of your working life give your pension a big boost.
Working another five years can nearly double the funds in your retirement kitty. Image: Shutterstock

Retiring early to enjoy life while still young is often tempting. People who may have lost their jobs due to the current economic environment might even be thinking of not looking for a new job.

Like most temptations, however, early retirement comes at a cost. Stopping work five or 10 years before normal retirement age actually costs millions.

Calculations by Esta Theron, business development manager at Glacier by Sanlam, show that working another five years would nearly double your retirement fund and eventually nearly double your monthly pension.

“Even if early retirement seems appealing, the numbers aren’t. If you are forced to retire early, say at the age of 55, it is best to try to earn a salary in some way for at least another five years. Retiring as early as 55 is just not the best decision to make, since you could still live for another 30 years and longer,” says Theron.

Read: Early retirement is tempting – but can you afford it?

She adds that people who want to opt for early retirement must make sure they have enough capital. “Working and saving another five years will not only ensure a larger income, but also will keep you economically active for longer which has great psychological benefits,” she says.

She uses an example of a 30-year-old who earns an annual salary of R325 000, equal to R27 000 per month. If they invest 7.5% of their salary into their pension fund (R2 031,25 per month), their retirement fund will amount to just less than R2.7 million when they retire at 55.

Millions less

If they choose to work for another five years and retire at 60, their pension fund will be 70% higher – at nearly R4.6 million.

Just 60 more contributions and another five years of compound growth would add nearly R1.9 million to their retirement fund.

Theron opts for a simple calculation to drive home her point of investing for another five years. The exercise assumes a growth rate of 10% per annum and no increase in the monthly contribution to the pension fund.

The difference five years makes
Age when starting to invest 30
Monthly contribution R2 031,25
Growth rate 10%
Total retirement savings at 55 years R2 695 130
Total retirement savings at 60 years R4 591 616
Difference R1 896 486 (70%)

Source: Glacier by Sanlam

Theron notes that the assumption of an annual return of 10% return is for illustrative purposes. “The general argument – that the capital amount of retirement savings from which a person would have to live off in retirement reduces by retiring early – still holds true at an average growth rate of 6.5%,” she says.

In reality, growth rates will differ from year to year, and this will have an effect on the final value of the fund.

For instance, higher growth during the earlier years would enlarge the fund quickly which will benefit the investor due to compounded return on the bigger amount for longer.

“The earlier the high growth the better,” says Theron.

“This is also the reason why one would normally recommend high risk and high growth earlier from an investment planning perspective.”

While Theron has calculated the disadvantage of retiring at 55 years rather than at 60, people usually only retire at 65. If a person works until 65 and continues to contribute to the pension fund, the amount at retirement would grow to more than R7.7 million, based on the same assumptions Theron has used.

Retiring 10 years before the normal retirement age of 65 will cost the pensioner R5 million, based on the simple assumptions.

Increasing contributions

However, most people who contribute to a pension or provident fund, or invest in a retirement annuity, will increase their contributions every year. The deduction for a pension fund is in many instances a fixed percentage of a person’s salary, and would increase as their salary increases.

In the case of retirement annuities, investors will choose an annual increase. These annual increases in contributions change the sums dramatically, as well as the difference between what is in the kitty when retiring at 55 and at 60.

Adding an average salary increase of 7% per annum and a 7% increase in contributions to the sums will boost the retirement fund to more than R4.6 million at age 55 and to nearly R8.4 million at 60. This also assumes an annual return of 10%.

Working until 65 can guarantee a good retirement – the pension fund will hit R14.8 million at retirement, according to Liberty Life’s online pension calculator.

Monthly pension

A smaller pension fund at retirement age translates directly to a lower monthly pension. When saving only the minimum and without increasing contributions, the figures suggest that a 55-year-old pensioner will have to make huge changes to their lifestyle.

Theron says that if her imaginary pensioner purchases a guaranteed life annuity with their retirement savings, they can expect a gross income of only R13 534 per month compared to their salary of R27 000. They would have to cut his living costs by about 50%.

If they worked until 60, their pension would have been more than R23 000 per month.

But the situation is much worse than Theron’s calculations show. The calculation of the monthly pension is based on the payout of a 20-year guaranteed life annuity assuming a 5% annual growth in income.

Thus, retiring at 55 years will give the pensioner their (low) pension only until they are 75. If they put in another five years at work, they would have nearly double the income until they reach 80.

If the pensioner lives to 89 they will be in distress in either scenario.

The Association for Savings and Investment SA (Asisa) recommends maximum withdrawal levels for pensioners at different ages that should be followed when deciding on the amount of income to be taken from a living annuity. This is to ensure that their capital is not depleted too quickly.

Maximum withdrawal guidelines

Age 55-59 60-64 65-69 70-74 75-79 80-84 85
Male 4-4.3% 4.4-4.8% 4.9-5.5% 5.5-6.2% 6.3-7.2% 7.3-8.6% 8.7%
Female 3.5-3.7% 3.8-4.1% 4.2-4.6% 4.7-5.1% 5.2-5.7% 5.8-6.9% 7%

Source: Asisa

That Asisa recommends that women opt for a lower withdrawal percentage is not sexist: women live longer than men and their money needs to last longer.

Asisa recommends that our 55-year pensioner should not withdraw more than 4.3% per annum from their living annuity in the first few years of their retirement.

Theron’s young pensioner will get a pension of only R9 657 per month. They are not set for a carefree retirement and won’t have money to enjoy their early retirement at all. With a bigger retirement fund at 60, and following Asisa’s guidelines, they would have been better off – with a monthly pension of R18 364.

Those who work until 65 are even better off. They can give themselves a pension of R35 291 per month if they take the recommended annual maximum of 5.5% from their retirement funds.

Listen to Nompu Siziba’s interview with Avishal Seeth, head of Umbrella Solutions at Sanlam (or read the transcript here):



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Just a couple of points. For me one cannot assume such high growth in the latter part of one’s career as you most probably will need to move to lower risk exposure to protect the capital of your pension. Meaning the lower growth is only to try and cover inflation and will rarely give any meaningful growth above inflation.

Also when comparing potential pension income to current salary you do not compare the pension income to gross salary, but rather to gross salary less pension contribution as you will no longer be making pension contributions when retired.

My grandfather retired early at the age of 55 and yes he may have sacrificed some pension income in the process, but him and my grandmother could spend the next 12/13 years spending meaningful time together and travelling a bit. In her late sixties / early seventies my grandmother’s health deteriorated a lot and my grandfather had to care full time for her up until her death. If he had only looked at the money aspect and worked until 65 they would never have spent those earlier 10 years doing the things they wanted to do. My point being that money may cost time, but that money cannot buy time.

Precisely why my husband decided to retire this year at 66, after a few gruelling decades as specialist physician. For a doctor, this is called early retirement and colleagues find it strange. You cannot control how short your life will be, but how long is up to you. We will not outlive our money.

“You cannot control how short your life will be, but how long is up to you”

Ok, I’m stumped. How does this work?

Dignitas, Switzerland.

I agree the article only considers financial factors. I think that the longer one works the better one is off financially but the quicker one dies. I am aware of 2 studies in the American aerospace industries. Basically Boeing did a study of how long people survived after retiring at 65 and the average was 18 months. Similarly another company, I think McDonald Douglas performed a similar study and found that the average lifespan after retirement was 17 months. Personally I consider that 60 is the ideal age to retire as one captures as much of the compounding investment income as possible and there is still a reasonable lifespan after retirement.

Agree. You know how much money you have. You do not know how mush time you have.

Instead of working 5 years longer, as the author suggested, why don’t the Glacier platform drop the amount they leech every month from their victims? The title says it all – “business development manager”. I have a severe issue with all these “johnny-do-good”-ies telling how they look after me while they are creaming it on the other side, and sanlam is in front of the race with this. Nothing personal Esta, but your employer is unethical IMHO, stealing from future pensioners and then act like they are doing them a helluva favour.

Glaciers are shrinking and retreating these days.

It is true that the compounding effect can have a substantial impact on retirement savings the last 5 years or so, assuming favorable market conditions. The option I prefer is to have a self-funded early retirement solution, that is delay pension fund withdrawals until age 65 and live off a discretionary savings pot before 65. So, if you have additional savings that can support your lifestyle for the next 10 years, then you can “retire” at age 55.

Well, savings dramatically up from 14% to 18% of GDP in the last year so I guess money managers are looking for part of the action. As always, consider the fees!
This bit didn’t sound right to me: “…payout of a 20-year guaranteed life annuity assuming a 5% annual growth in income.
Thus, retiring at 55 years will give the pensioner their (low) pension only until they are 75.”
If it is a guaranteed life annuity does that not mean that 20 years of payments are guaranteed regardless of whether you die in that period BUT the payments continue after 20 years if you are still alive.
Also, life annuity prices might improve slightly due to the massive COVID excess mortality in over 60s and the annuity profits life insurers are booking on that.

I find these articles offensive in that assumptions are made based on their conventions. There is a simple trick to this whole exercise – start from day 1 of your work life, increment your contribution each year, invest a lump sum from time to time (write it into the contract), whilst following this approach also upskill yourself on the local stock exchange and invest in the exchange over the long term. On retirement work on a slow start to the drawing of your pension so that the capital is hardly eroded and run a retirement period budget and stick to it

And if you worked 5 years more after retirement, compounding will be more to your advantage – where do you draw the line? 55-65 is merely a guideline and if you can afford to retire early, go ahead. You’ve planned for this! Compounded fees might be the reason they want you to hold on a little bit longer

@ Banana. One must stay in high risk exposure investments your whole life. If you can live another 10 years or longer after retirement then it is long term investing and you need growth.

That famed upwardly curve graph we’ve seen before 😉 (thanks to inflation)

Obviously, the longer you work, the longer your retirement capital builds up, and (statistically) fewer years until death to life off it.

Is the concept of ‘retirement’ necessary? Ask all the global super-wealthy (Bill Gates, Jeff Bezos, Elon Musk…and our own Johann Rupert, Patrice Motsepe, etc) still actively busy with their empires….despite able to retire. They don’t want to retire.

Back to the article’s calculations…did it for myself & I keep getting my own retirement estimates wrong:
my calcs tell me, that I will be able to comfortably return 5 years AFTER my death…!

Michael, you still persist with the concept of retirement for the ultra rich? Of course, they dont want to retire…HOWEVER, us mere mortals who work for companies owned by these mega-rich ARE FORCED TO RETIRE!??

Please stop embarrassing you and your profession? You make obscene commissions from us as it is, and for what value-add?? When market goes up, you take your ‘pound of flesh’; when markets drop, you still take your ‘pound of flesh’ ….. enough now flogging this concept thats made you and your companies obscenely rich, especially with old-style RA’s!??

How would I as a Tax Consultant make “obscene commissions”??

We’re NOT in sales. We thus charge fees, based on time/complexity, like doctors, lawyers, engineers, IT techies, etc.

We don’t even take high markups, like business/shop owners.

(Now be nice & kindly tell readers in what industry you’re in, and I’ll try to spill the inner beans how your industry cheat the public in order to make a decent living? I’m listening..)

MichaelfromKlerksdorp, this is a copy-and-paste from 6 months ago, when you responded in the same way as now re. retirement:
“Come-on……you know the answer!??
Not everyone is the owner/creator of their company they work for!??
Other mere mortals, work for these companies and are forced to pay exorbitant fees to the likes of you ‘investment advisors’ for their retirement planning??
These super wealthy as you put it, hire dedicated, professional employees to take care of their investments!? AND they are NOT forced to retire from their company’s Pension Fund at a certain age? This NEGATIVE CONNOTATION of retirement, is FORCED on us!???”

And you never contradicted my insinuation of exorbitant fees (in above).
P.S. I’m a retiree who was fleeced by old-school RA’s

This white piece of ice was bad news for my Mother. Even after 5 years.

End of comments.



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