The personal planning journey towards retirement

2. How much do you need to retire?

Good news, however, is the fact that it is not all doom and gloom. A comfortable retirement can be within your reach. The problem, however, is that many of us are not financially empowered to tackle this monster head on:

• The objectives and the outcomes of the retirement savings goal must be monitored, twisted and adjusted on a regular basis.
• You may be investing too conservatively and your investment returns and growth gets dented by inflation in the long run.
• The complexity of the many investment choices and retirement products may feel like a proverbial merry-go-round.
• Experiences of the past create mental short cuts on which we base most of our actions. It is not different when it comes to saving towards retirement.

Without using fancy retirement calculators, how much do you need to retire?

1. The rule of thumb is to start saving between 15% and 17% of your taxable income from your very first paycheck onwards as part of your long-term retirement savings goals.

2. This will allow you to retire with an income roughly equal to 75% of your final salary at normal retirement age.

3. How to achieve your retirement savings goals?

This rule of thumb methodic sounds easy enough if you ignore it for the moment:

• The highlighted pitfalls like financially illiteracy,
• The potential lack in sufficient growth on your investments, and
• The harsh reality that this rule of thumb is only applicable if you are about to receive your first paycheck

These numbers are simple calculations based on the value of your first salary and assuming a consistent, inflationary salary increase annually. This is, however, a world apart from the realities of life and it does ignore the fact that:

• You may get retrenched or resign and have access to your retirement savings long before the retirement date
• You may get divorced and loose a substantial portion of your retirement savings because of the clean-break principle and the divorce settlement
• You have other savings obligations for example saving for children’s tertiary education,
• You may be self-employed. Business cycles and unfavorable economic conditions means there is no consistent paycheck

One of the most significant erosion factors on one’s retirement savings is not preserving when leaving an employer. One may be tempted to make interim withdrawals from your retirement funds when switching between employers. Beside the retirement lump sum tax on such withdrawals, it means start saving for retirement all over again, with less time to achieve the original long-term goal.

If you choose to use a retirement fund as part of your savings there is an added benefit:

• The government incentivises any investment towards retirement, because it ultimately eases the burden on the state’s obligations towards the elderly population of the state
• The government “pays” you a considerable amount of money to save for your own retirement
• You can deduct your retirement savings contributions from your taxable income on your annual income tax return. An amount up to 27.5% of the greater of your taxable income or your remuneration, with an annual ceiling of R350 000 to your retirement fund from your taxable earnings will apply. The term “retirement fund” include pension, provident and retirement annuity funds

4. An example of the tax benefit when saving for retirement

If you earn R240 000 per year and contributed R66 000 (27.5% of R240 000) towards your retirement savings by means of a retirement investment fund in the last tax year, your income tax will be calculated as if you have earned R174 000 for the specific tax period. This results in you paying less income tax. That is a saving of nearly R16 000 in income tax! If you have opted to invest the R66 000 directly into a unit trust for example, you would not have qualified for the tax relief. What will you do with this R16 000?

• Do you re-invest it towards your long-term retirement goals,
• Or will it be a nice freebie for that holiday in December? SARS and government are trying their ultimate best to subsidise your retirement investments and not your annual holiday

Although the tax break is a massive incentive, the bigger focus should always be on what your ultimate retirement goal is and how to achieve your retirement goal, not clever tax calculations. You can bet your bottom dollar that the R16 000 will not be re-invested towards retirement.

Other benefits when using a designated investment retirement product:

• The fund value will be protected against creditors before retirement from the fund
• The fund is not subject to executor’s fees and only disallowed contributions will be subject to estate duty

5. How to plan for retirement:

1.    Try to invest consistently. Make use of financial planning calculations to determine what is necessary to reach your long- term financial savings goal.

2.    Make use of the tax-benefits when saving towards retirement; this refunds can be used as additional savings towards retirement and in that way SARS is contributing towards your ultimately retirement.

3.    Diversify your investments. The biggest risk you can take is having all your investment eggs in one basket.

4.    Stick with your financial plan and long-term financial and saving goals – Rome was not built in a day.

5.    Work with a professional Financial Advisor - you will have plenty of questions, fears, issues and joys along the way and therefor it is important to find a professional partner.

6.   Preserve your retirement savings when moving between employers and try to settle debt before retirement.

6. What is compound interest?

When you are investing over a long period and have a disciplined long-term savings plan, your invested funds start to work for you from the day you invest. The benefit of compound interest means that you earn growth on the growth − so the longer you invest, the bigger the advantage. Over 30 years, more than 65% of the value of your retirement annuity could come from this compound growth alone. Always consider “investment enemy number one” namely inflation. A 6% inflation rate will almost halve the value of your money over 10 years. After 20 years, your investment will lose 70% of its purchasing power. This is why your investments needs to deliver interest rates and returns that outperform inflation.