Planning for retirement

How and when you stop working is entirely up to you - but we all take similar steps to get there. Working towards a wealthy and happy retirement could take between 20-40 years. Follow this guide to know what you must do during this time. 

Figure out what you need

Map out what your financial responsibilities will be when you retire. Your house may be paid off and your children supporting themselves; but are you saving enough money to protect your lifestyle?

  • Three golden rules that you must follow

    • A good retirement income should give you about 70% of the last salary you received. Remember that this differs from person to person because it depends on the lifestyle you want to have after retirement.

    • Don’t wait until you ‘earn enough’ to start saving – it’s about starting early and making smart financial choices all throughout your life.

    • Don’t underestimate how long you will live into retirement.

Plan your finances

One of the first important steps to financial planning is understanding what a pension fund is and how it works. 

  • What you should know about a pension fund

    • You belong to a pension fund if you’re employed, and it’s a part of your working agreement.

    • You belong to your employer’s fund, who deducts a monthly contribution from your net salary and takes care of the admin.

    • Your pension contribution is tax deductible up to R350 000, or 27.5% - depending on which is less.

    • You can change your pension fund when you change jobs, but some funds let you remain a member after you change jobs.   

    • Some employment pension funds allow you to choose your investment portfolio.

    • Companies in South Africa aren’t obliged to belong to a pension fund, so always check your working agreement.
  • What to know if you don't belong to a pension fund

    • You can belong to a retirement annuity (otherwise known as a personal pension plan). The money that you put into this is untouchable until you turn 55.

    • However you decide to save money, you should be putting between 10-15% of your net salary away every month.

    • Similar to a pension fund, retirement annuities don’t form part of your estate when you pass away.
  • What you should know about tax rates

    Whether you belong to a pension fund or a retirement annuity, the first R500 000 of the total amount is tax-free. A lot of people think that you get R500 000 tax free every year. Don’t make this mistake.

    Any cash-lump sum you withdraw above R500 000 is tax-deductible. The tax rates for a pension fund or retirement annuity are as follows: 

    • R500 000 – R700 000 is taxed at 18%

    • R700 001 – R1050 000 is taxed at 27%

    • R1050 001 and over is  taxed at 36%

Get the right advice

Once you know how much you can save every month, you can start building your wealth strategy. Financial advisors help you put your goals into perspective so that you can make smart financial decisions. If you’re not ready to involve a financial advisor yet.

  • A few tips to get you headed in the right direction

    • Always factor tax and inflation into your calculations.

    • Diversify. It’s not good to put all your savings in one place. You can invest in different assets like property and shares too. Make sure that whatever you invest in, your capital won’t dip, even if the market does.

    • Your age and income determines how you should invest. If you’re young you can take more risk. If you’re older it might not be such a good idea.

Once you’ve planned properly, saving money will be easier and your wealth creation will be on the right track.
 

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