Retirement 101: How to ensure you can retire comfortably
This content is supplied by Overberg Asset Management
When it comes to retiring, there is no 'one size fits all.' Every single one of us has unique needs/lifestyles we are accustomed to, as well as a desired retirement age. Taking all of this into consideration, there are a few different tried and tested strategies, that many of us financial advisors have used over the years, which have helped our clients stay on track over the longest savings plan many of us will ever have.
RETIRING IS SERIOUS. TAKE IT SERIOUSLY. A staggering 36% of the country only, is saving for their retirement, of which only 6% will have enough to retire on. South Africans as a whole, are notoriously known as having one of the lowest savings rates in the world. This not only puts pressure on the next generation to support the elderly but can cause vast amounts of stress when you should be enjoying your well-earned time off. This is termed the "sandwich generation" whereby these children carry the financial burden of having to provide for their children as well as their parents. Let us help change this narrative.
BENEFITS OF SAVING FOR YOUR RETIREMENT: You spend your entire life working so that you can retire comfortably and live the life you have always desired. Retirement should be seen as your golden years where you have time to do all the things you have always wanted to do but have not had the time for. Make a bucket list of all the experiences you would like to do in retirement. Is there a cruise you would like to go on, or a hobby you would like to explore? Make a detailed list of how much all these luxuries will cost you so that you can add them into your retirement budget.
How can one best ensure that you are not another South African statistic? The first point to make, and to keep clear in your mind is to have a defined retirement goal. What level of income would you require if you were to retire today? Taking into consideration that the biggest expenses at retirement are mainly medical, your other fixed expenses will hopefully take a back seat as your houses, cars, and other loans will be paid off by then.
This forms part of the second point of your retirement journey – Estimate how much you will need in retirement savings to maintain your desired lifestyle. A qualified financial advisor will have the tools to do this exercise with you. Factors to take into consideration are the tax rebates, compound interest, inflation, and risk profile. Once you have this lump sum figure, it is easier to work out how much you need to contribute monthly, as well as calculate what the shortfall is, and how you can best bridge this gap.
CONSTANT REVIEWS OF WHERE YOUR INCOME IS GOING: Are you budgeting effectively to ensure that every month, you are maximizing your retirement annuity contributions? A great rule of thumb is to break down your salary monthly into wants, needs, and savings. This is broken down effectively by Forbes into the 50/30/20 rule. 50% of your income should go towards needs, 30% should go towards wants and 20% should go towards savings and debt payments. Out of this 20% of your salary- if 7-10% of your net salary can go towards retirement savings, from an early age, this is very achievable. The effect is also less painful if you are diligent and have your debit orders coming off on the same week that your salary is paid.
REVIEW YOUR RETIREMENT ACCOUNTS REGULARLY: Regardless of whether you have a work pension/provident fund or private retirement annuity, make sure that you review your savings at least once a year. These funds are seen as long-term savings, so they should be invested in more moderate portfolios, so the true growth you will see is only after a five-year mark. Reviewing your savings is not only about the funds they are in, but also the fees you are paying, tax rebates you are getting back, as well as being honest with yourself about whether you can/should save more in the following year.
BE FLEXIBLE: A retirement annuity is a 30/40/even 50-year savings plan and life will happen along the way. Do not be so hard on yourself if you need to adjust along the way. If you need to pause your fund (Many of my clients exercised this option during Covid-19), but where possible, NEVER cancel your retirement savings. The compound interest will all be worth it in the end. As Einstein expressed, compound interest is the eighth wonder of the world.
PROFESSIONAL GUIDANCE IS KEY: Working alongside an independent, qualified financial advisor goes a long way. It is their job to make sure that they put you in the correct structure, diversify your investment, and adjust along the way. They are incentivized to make sure your money grows as fast and as steadily as possible as their earnings are linked to your growth.
CONSIDER ALL YOUR OPTIONS. NOT JUST LOCALLY, BUT OFFSHORE TOO: There are tax benefits associated with saving in a South African retirement annuity (RA), such as the contributions you make into your personal RA, which are tax deductible (up to 27.5% of your income). This is capped at R350,000 per year. Another benefit of investing in a South African retirement annuity, is that both the income gained as well as the capital gains earned within the pension, are exempt from tax. There are, however, stringent rules on the accessibility of these funds at retirement which require a lot of consideration. There are also rules on the funds you can invest in; this is called Regulation 28. This stipulates that no more than 75% of your investment can go into equities and that no more than 45% of your funds can be in offshore assets.
There are options offshore that may be worth considering rather than the standard retirement annuities in South Africa. You will not be able to receive the tax rebates, however, you will have access to global funds which you would not have access to in SA as well as complete flexibility of access to these funds at retirement age. Another benefit of investing offshore is that if structured correctly, these funds can never be repatriated, nor will they form part of your estate on death. There are no limits to what you can or cannot invest in and allows you a lot more freedom.
As you can see, there is a lot to take into consideration when thinking about your golden years, and planning is key. Our team at Overberg Asset Management has the skill set to help you plan your retirement effectively and efficiently. Reach out to us to go through all your options and find the most desirable solution for you and your family.
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• All writers' opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
• 'Overberg Asset Management (Pty) Ltd. is an authorised financial services provider: 783' established in 2001.