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The importance of planning for retirement

Even if it’s still many years away.
A lack of planning means you may need to work longer, have a second career, or perhaps to turn a hobby into a way to earn an income. Image: Shutterstock

If you haven’t started saving for retirement, you should consider starting now, even if it’s still many years away. The earlier you start saving, the more compound growth you will accrue.

Most people have mixed emotions about retirement. While to some it is the end of their long career, others are more optimistic and see it as the beginning of their golden years.

Approaching retirement can be a daunting prospect and a huge emotional barrier to overcome, especially for the sandwich generation – people typically in their last 10 years to retirement, who are responsible for supporting their own children while also caring for their aging parents.

According to some research, close to 50% of all adults are confronted with this phenomenon. The fact that people are living longer and the fact that children are still dependent long after they have completed their schooling are perhaps the main reasons.

To make things worse, saving for post-retirement medical expenditure is fast becoming a reality for many. What can we do if we find ourselves in these scenarios?

Implementing a sound strategy is the answer, but how do we do this?

Firstly, take charge and be accountable for your actions. Although pension fund rules may dictate that you have reached retirement and are entitled to a pension, the choice to retire from life remains yours.

Some things are beyond your control, but choosing the date of your financial independence, historically known as ‘retirement’, coupled with the most effective way to save for this date, is of crucial importance.

There are three stages during which many people will have to make crucial choices:

  1. The first is the building up of funds;
  2. The second is the date you feel confident you are financially independent, and
  3. The third is drawing down on your capital.

If you have not accumulated sufficient funds, you will be compelled to work longer, to have a second career, or perhaps to turn a hobby into an income-earning business venture.

Taxpayers can claim tax deductions for contributions made to a retirement fund and nothing prevents a taxpayer who contributes to a pension fund from making additional contributions to another retirement fund. Currently, contributions are tax deductible up to 27.5% of remuneration or taxable income, subject to the annual maximum.

The final stage of retirement decision-making is when the balance of the funds must be invested in a compulsory annuity, whether a guaranteed life annuity or a living annuity.

The latter requires more ongoing financial advice on drawdowns and should be carefully monitored, preferably in consultation with a competent financial planner.

What is a retirement annuity?

A retirement annuity (RA) is a potential option for a person wanting to save for a comfortable retirement. While an RA can help you invest for your future, it also currently offers the additional benefits:

Almost no tax: Paying tax on your proceeds is deferred until your retirement, which means there’s a larger balance that will compound, tax-free, for as long as you keep your money invested.

Regular retirement income: At retirement (or when you turn 55), you can currently withdraw up to one-third of your savings out of a RA, as a cash lump sum, tax free for up to R500 000. As per the regulations on RA’s, the remaining amount must be transferred to an annuity account and can be used as your monthly pension.

Early withdrawals in certain cases: Members under the age of 55 may be able to retire early from their retirement funds due to ill health.  Where the value of the fund is below R7 000, the full amount can be withdrawn. Persons emigrating from SA can currently withdraw the full value of their retirement annuity. However, it’s important to be aware of the Taxation Laws Amendment Bill tabled by the Minister of Finance on October 28, 2020, which if approved, will impose a three-year waiting period, effective from March 1, 2021.

Flexible payments: You can make monthly contributions, add a lump-contribution (salary bonus or tax return) or, if needed, pause or even stop your RA deposits at any time without significant impact on your investment value. But try to keep your contributions regular, no matter how big or small.

Diversified portfolio: Having an RA gives your investments access to different asset classes and geographical regions.

Safe and sound: Your creditors can’t touch your RA if you become insolvent. No one, other than you and your chosen dependents, can have access to your funds.

Even if you have no discipline, your RA will ‘save you from yourself’ as you cannot access it until you are 55.

This means your savings will only be available when they are most needed and for what they are intended: your retirement income.

Should you pass away, your beneficiaries can choose to receive a share of your RA as a cash lump sum, an annuity, or a combination of the two. The annuity income will be taxed according to the current income tax table. Cash lump sums will be taxed according to the retirement lump sum tax table.

Before making any final decisions, it’s always worth speaking to a professional financial planner about your options.

Errol Meyer is a legal specialist at Standard Bank Financial Consultancy.

COMMENTS   6

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No mention of costs/fees for keeping an RA in place, and look out for costs when doing your monthly/annual draw downs

Of course costs and fees are important but that in no way negates the contents of the article.What’s more important than costs is proper advice, the research one should do is on finding the best planner for yourself. Once you have done this the cost discussion will be had.

Michael, you have some very strange ideas of what retired people do, or was that also ” tongue in cheek”?
Not all pensioners sit on the stoep, reading a book and drinking coffee all day.
How one faces / manages retirement is very much a state of mind , and finances allowing , enjoying your time with your spouse , children, grandchildren and friends. I for one would not swop it for the daily grind.

The heading “the importance of retirement planning” is very crucial and valid.

That brings me to the following:

The following (insanely wealthy) people, are STILL WORKING, so I assume something must’ve gone wrong with their retirement plans(?)

Jeff Bezos
Bill Gates
Warren Buffet
Mark Zuckerberg
etc…
..and in Mzansi, our own Patrice Motsepe, Johann Rupert, Tokyo Sexwale, Nicky Oppenheimer, Koos Bekker….etc

All these super wealthy FEAR THE CONCEPT OF ‘RETIREMENT’.

The problem could be the word ‘retirement’. If a vehicle, ship or aircraft is earmarked for retirement, it means “not useful anymore / withdrawn from active service / cast aside & laid to rest”. All have negative connotations.

They will NEVER retire!

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!???

Was a bit tonque-in-cheek from me 😉

…the answer is wealthy, succesfull creators of their own businesses FEAR they will lose their self-worth, or purpose in life, if they sit on a stoep reading a book for the rest of their retired life.

They have the choice to remain active, and keep their brains busy (fighting onset of dementia)

End of comments.

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