For most people, retirement tends to be either a passing thought or an eventuality that we assume we are well prepared for, through the company we work for. Yet in reality most employees are not adequately prepared for retirement, meaning they have not saved enough money to sustain their lifestyle during retirement. Statistics show that 51% of South Africa’s pensioners can’t make ends meet and that a third of them do not have enough cover for medical expenses, which is the second biggest expense for pensioners.
Have you asked yourself – is my Retirement Annuity (RA) in order? Do I have a Retirement Annuity? Am I adequately prepared for retirement? If the answer is no to any of these questions, read on.
By investing in your retirement you can ensure that you will be able to retire when you want to, not when you can. More importantly, while you invest you are also able to get an annual tax benefit. This is because your contributions to your RA are tax-deductible (more information on this is available from SARS).
Many people expect to fund their retirement solely from the contributions made to their employer pension scheme. However, the low savings rate in South Africa, coupled with the increase in life expectancy and rising cost of living, are likely to impact on our ability to enjoy a financially secure retirement in the future. This means we need to accommodate these factors to ensure that we have enough in the kitty to meet our long term retirement needs.
The reality of the current situation is that we will probably spend between 20 to 30 years in retirement. This is already happening in Europe where some countries have already started increasing the retirement age to help employees cope with higher life expectancy. The 20-30 retirement years need to be funded by an average work life of between 40 to 45 years. Given the uncertainties of life, we need to maximise the opportunity of building up sufficient capital for retirement during our active working years.
The common mistakes that people make when it comes to retirement planning include starting late, early pension withdrawals when changing jobs and not seeking professional advice about their retirement. However, the challenge is by no means insurmountable. In fact, there are 7 simple principles you can apply to help you become financially independent and have a comfortable retirement:
- Start saving as early as possible. The recommended age is 23 (56% only start at the age of 28)
- Develop a budget that enables saving
- Create a retirement plan with short, medium-and long-term income and capital goals
- Seek specialist assistance and advice from a Financial Adviser to develop and maintain a retirement plan
- Design an appropriate investment strategy to match your financial objectives and investment terms
- Continuously enhance your knowledge relating to savings and investments
- Preserve your retirement capital when changing jobs.
Retirement solutions are offered from various companies and you can start to save towards your retirement capital from as little as R250 by monthly debit order, lump sum investments of R10 000 or additional investments of R5 000.
Lastly, people often ask, how much does one need to retire comfortably? The rule of thumb is after 10 years of working, you need to have saved 2 x annual salary, after 20 years 4 x annual salary and after 40 years this figure should be 12 x annual salary.