Planning Perspectives

Retirement: don’t become a statistic

Palesa Tlholoe

Most of us will work for at least 35 years. That’s plenty of time to save for retirement, right? You’d think so, but the reality is that only about 6% of South Africans will be able to retire comfortably. How scary is that? The reasons are numerous: pervasive low income and retrenchments, a high debt-to-income ratio for the majority of the population, and a general lack of understanding about how retirement funds work.

Don’t be part of the problem. Here are a few tricks to turn your savings situation around.

DO YOUR SUMS

In order to save smartly, you need to know how much you’ll need each month in retirement. The rule of thumb is 75% of your pre-retirement income, but this depends on so many lifestyle and other factors. Calculating the monthly amount is one thing, but you also need to work out how to get to that goal, by factoring inflation and investment growth rates into the equation. There are some complicated sums involved in a retirement analysis, which is why it’s best to consult with a professional. A Certified Financial Planner (CFP) will make sure you save the right amount each month to reach your retirement goal.

START AS EARLY AS POSSIBLE

Start contributing to a retirement fund as soon as you start working to give yourself as much time in the market as possible. The benefit of remaining invested for 30+ years is that you take advantage of compound interest – the interest you earn earns its own interest and your savings grow exponentially.

Time in the market also allows you to invest in slightly riskier asset classes such as equity funds, which might fluctuate in the short term but will offer excellent growth in the long run.

DON'T CASH IN WHEN YOU CHANGE JOBS

If you’re still young and you resign from one job to start another, it’s tempting to draw the savings in your pension fund. Maybe you need the cash for your house, or you have a side hustle that needs a financial boost. Bad idea. Not only will you be taxed on the withdrawal, but you’ll set yourself back years in terms of growth. Rather transfer your pension or provident fund tax-free to a preservation fund, a retirement annuity, or your new employer’s fund. It’s important to choose the correct option based on your personal circumstances. Again, we recommend you seek the advice of a professional financial planner before you decide.

TAKE ADVANTAGE OF THE TAX INCENTIVES

There are very real tax benefits for saving towards your retirement. You can deduct up to 27.5% or R350 000 (whichever is lower) per year from your taxable income if you contribute to a pension fund, provident fund or retirement annuity. At the end of the day, saving for retirement should be a priority. A retirement fund is safe (it’s completely protected from your creditors if you pass away), it’s tax-efficient and it offers good growth. But most importantly, it gives you the peace of mind that you will be financially independent in your golden years. That’s priceless.

And remember, a CFP professional can assist. You can find a list of planners at www.fpi.co.za Tlholoe, CFP, is co-founder and a wealth manager at Imvelo Wealth Solutions.