The key to comfortable retirement

Rather than looking forward to the freedom of retirement, many of us are nervous about it. According to Shaan Watkins, Head of Absa Linked Investments, less than three in ten South Africans are able to stop working and still live comfortably, retaining the lifestyle they’re accustomed to when they reach the age of retirement.

“These days we’re living longer than our money is lasting,” Watkins says. “Also, as a nation, South Africans are notoriously poor savers. Life just gets in the way. We’re establishing our base in our late 20s and 30s and we’re having children, so our cost of living goes up in those circumstances because we just don’t prioritise saving. That means that by the time people are ready to start saving (when their children have finished their education, the house is paid off, etc.) we’re in our 40s, and we don’t have enough earning years left. Generally very few people earn enough to catch up those first years we missed,” Watkins continues.

The story of Adele Kruger* is a painful illustration of just how badly a family can be hurt when financial planning has been neglected. Adele and her husband had their own small business. He handled the finances, while she focused on customers and operations. When he died suddenly in his early 60s, it emerged that he had dipped into their reserves over and over to cover certain unexpected emergencies that would arise - for example, when a vehicle needed replacing, or when big bills needed to be paid. The result? There wasn’t a lot of money left in their business, nor their personal savings.

Adele kept the business going, but when poor health forced her to stop working about a decade later, the money soon ran out. She has four adult children, but none of them were big earners, and they all had young families of their own. Bad blood developed as each sibling accused the other of “owing” their mother more, and of neglecting her. Meanwhile, Adele depended on her state pension and occasional support from her children.

It’s not a situation that anyone should be in at the end of a hard-working life and it speaks to another dimension of long-term savings - the legacy we want to leave.

Moses Duma, Absa’s Head of Customer Value Propositions, points out that legacy can be defined in different ways. For some, legacy is the knowledge that when you die, the people you leave behind will be looked after. So, investing in education for your children, or in a home for the family, is a form of legacy-building. Another dimension is about creating memorable experiences for your loved ones. “It’s important to have a savings and investment plan that will enable you to achieve your objectives,” Duma points out. “Leaving a legacy is all about planning for the future.”

It broke Adele’s heart that the legacy she left behind for her children was in-fighting and financial stress.

The bottom line? Start saving for retirement as early as possible. Savings and investments earn returns – and those returns also earn returns. This is called compound interest, and it’s exactly why time is the great driver of success factors when it comes to meeting our financial goals. “The conventional wisdom is that we must save 10% of our gross income throughout our working lives,” says Sylvester Kgatla, Head of Absa Fund Managers. “That’s not realistic for most of us. But it is generally believed that if you start in your 20s by saving 10% of your net income and over time, as your income status improves, you increase that to 20%, your planning will technically be on track.” It’s also recommended that you check in at regular intervals with an accredited financial adviser to identify how changing needs and circumstances might impact on your financial planning and to develop financial strategies that best suit your own particular needs.

So, what must you do if you’re among the majority of people who haven’t managed to pull this off?

According to Watkins, the first step is to make up for lost time as best you can - which means making saving an absolute priority. Sit down with a financial planner and draw up a full picture of your desired future status, then you can plan. Alternatively, get in touch with Absa’s Virtual Advisor who is available at your convenience over the phone.

Kgatla and Watkins point out that SARS also provides vehicles to incentivise retirement savings.

You can benefit from these three in particular:

·       RETIREMENT ANNUITIES - SARS allows us to save up to R350 000, tax-free, in a retirement savings fund per year. “So, even if you are a member of a pension or provident fund at work, you may want to consider taking out a retirement annuity (RA) in which you can deposit additional savings up to the allowable limit. If you exceed R350 000, current tax laws allow that tax break to roll over to the following years. A retirement annuity is an excellent vehicle, particularly because the money is locked up until retirement,” Kgatla points out.

·       TAX-FREE SAVINGS AND INVESTMENTS - Another option is tax-free investments and savings accounts where you can deposit a maximum of R33 000 per year, with a lifetime limit of R500 000. If you have reached your tax-free retirement contributions limit, this could potentially be a great vehicle. Watkins explains that if you use this option wisely, you may have access to enough cash to allow you to live until your tax bracket changes when you retire. This takes about 12 months from your retirement date.

·       PRESERVATION FUNDS – This is funds in which retirement savings are deposited when you change jobs. They are another tax-neutral option. The only difference is that these funds can’t be topped up with monthly or occasional contributions, but they do continue to earn returns for the duration of the investment. "A single withdrawal from your preservation fund may be made pre-retirement, which is a good emergency option, but," Kgatla warns. "This is taxed at your marginal rate."

We have a broad range of products that supports long-term saving. And if you access them via Absa’s own platform, it means that you won’t pay administration fees. These “DIY options”, says Watkins, "are structured specifically according to your risk appetite.” But, if you’re more comfortable with human interaction, feel free to chat to one of Absa’s financial advisors at your local branch or via the call centre on 0860 265 265 or send an email to virtualadviser@absa.co.za and we’ll call you back.

“The product isn’t the magic bullet,” Watkins concludes. “Planning, savings and time is what will ultimately get you there.”