If retirement is in your near future, do you have a specific number — that is, minimum savings amount —in mind? How did you arrive at it? Are you on track toward reaching it by the time you leave the work force? And if not, we will work with you to understand what you need to do to get there.
Achieving a comfortable lifestyle in those golden retirement years can be a scary thought these days. Retirements will last far longer than in the past. However, the task is not impossible. Knowing how to invest your savings will go a long way in helping you meet your retirement goals. Most individuals, though, are also saving for other goals during their lifetimes – for instance, a house, car, or for their child’s education. Therefore, it is important that retirement planning covers all aspects of an individual’s financial life.
Retirees who successfully live off of their savings share a few qualities. They started saving early and continuously put money away. They considered their options and developed a plan. They took advantage of the tax-efficient status of retirement products. Most importantly, they preserved their retirement benefits when changing jobs. This article provides a short guide to the essential issues to consider for retirement planning.
Evaluate and compare the different retirement options
The starting point is to consider the “how” part of the process. What are the options available to you when saving for retirement? There are three main ways to save for retirement: a pension, provident and a retirement annuity fund. Being aware of the types of retirement saving vehicles helps you make a more informed decision about how you want to structure your savings. There are many factors that you should consider when deciding which products best serves your needs i.e. tax benefits and withdrawal restrictions. When selecting a product we allow for the investors’ personal circumstances and consider all their post-retirement goals. All decisions are forward-looking and we assess potential scenarios post-retirement.
How much can you afford to save now?
Two elements are essential to any savings plan: You must know how much you need, and you must know when you will need it. This is perhaps the single most important consideration. Of course, it’s up to you but it usually depends on these main factors – when you would like to retire, what lifestyle you would like in retirement and how much can you afford to save. This may vary for lots of reasons throughout your working life. When saving for specific purchases in the not-too-distant future — a new car or a house — those elements are relatively easy to determine. These elements aren’t at all easy to figure out for retirement planning.
If you are employed, chances are that you belong to either a retirement annuity, pension or provident fund. If you already contributing to a retirement fund, make sure it is on track to pay out the income you need and regularly check your benefit statement to see if you need to supplement your contributions. If you don’t have retirement savings, now might be the time to set up a retirement fund. It’s important to think carefully about what you’re trying to achieve with your savings – and whether you’re saving enough.
How much money will you need when you retire?
There is no concise answer to this question. It’s impossible to predict with much accuracy how much you will need in retirement many years down the road, since all of the assumptions can change dramatically, including your own desires. It’s really a question of what is appropriate for an individual. We recommend aiming for a general savings target, and every few years review your assumptions and see if you can bring your target into closer focus. Remember, when you do retire, you will have to adjust your lifestyle to your savings, rather than the other way around.
Retirement plans are designed to replace only a portion of your salary upon retirement. A replacement ratio is often used as a simple estimate of the proportion of current working income you can expect to have during your retirement years. An employee earning R10 000 before retirement with a replacement ratio of 75% can thus target to earn R7 500 as their typical retirement income. A replacement ratio of at least 75% is said to be ideal, because it can be anticipated that by this time, an individual would be free of major financial obligations, such as a mortgage bond. As a result of this reduced financial burden, they would then be able to adjust their lifestyle accordingly.
How long will you spend in retirement?
The approach here assumes you will use up all of your savings in retirement, so the question is based on how long you expect to live after you retire. The average South African retirement age is 60, but the average non-retired South African expects to work until age 65. The average life expectancy for someone reaching 65 is about 20 years, but one out of every four 65-year olds will live past age 90 and one out of 10 will live past age 95. If you plan to retire at age 65, assume a retirement period of at least 20 years; or longer to be more conservative or if you plan on retiring before age 65.
Allow your retirement savings to grow
Compounding is often referred to as “magic” because it is one of the simplest ways to build wealth, yet takes the least amount of effort. Compounding is when a sum of money invested earns interest, and in the following period, interest is earned on both the capital amount and interest previously earned. To work, it requires two things: the re-investment of profits and time. The more time you give your retirement savings, the more you are able to fast-track the income potential of your original investment. For instance, if you invested R10, 000 today and it earned 8% annually, you would have R100, 626 at the end of 30 years; if it earned 9% you would have R132, 676 after 30 years. That’s a R32, 000 difference with only a 1% difference in return annually.
Planning is important
Retirement security is a top financial concern for all employees, but for many this can remain just a dream as they fail to save appropriately for it. The key is to make the answer of what retirement looks like for you an important part of your planning, so you can understand how this may impact you financially. While most of us would probably prefer to spend our pre-retirement years planning ways to make retirement more meaningful, the simple, hard truth is that retirement readiness really does come down to numbers.
One of our primary goals for our clients is to hold their hand during their financial journey. We understand that when it comes to retirement planning, peace of mind is more important than anything else. Whatever your vision of the “perfect” retirement happens to be, our first and last question is: Will you be able to support yourself financially when you no longer working?
Thandekile started out at Inkunzi Wealth Group as a graduate trainee in the Client Advisory Centre before moving to wealth management. Thandekile is responsible for providing comprehensive financial planning and assisting our clients pursue their wealth management goals. She holds a BCom degree in Finance and has also completed her BCom Honours in Financial Planning through the University of Johannesburg.