Understanding Your Retirement Plan – Will You Make It?

July 21, 2020

Justin Els
July 21, 2020

Retirement planning is a multistep process that evolves over time. To have a comfortable, secure—and fun—retirement, you need to build the retirement plan that will fund it all. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.

South African Retirement Statistics

94% of South Africans cannot afford to maintain their standard of living once they retire. Those who contribute to a pension fund for 40 years can still see an income drop of 20% at retirement. According to the most recent Sanlam Benchmark Symposium survey, 51% of retirees can’t make ends meet. About a third don’t have enough funds to cover their medical expenses. Also, about a third entered retirement in debt, and more than half of retirees still have to support adult dependents. As a result of these financial pressures, 61% simply can’t afford to save for a ‘rainy day’ fund, leaving them unprepared for unexpected expenses. These statistics show that for many South Africans, retirement is a constant battle for survival.

How Much Do You Need To Save For Retirement

Based on the following assumptions, here is how much you need to save for retirement as a % of your salary:

Growth Rate: 10%
Inflation Rate: 4,5%
Premium Escalation Rate: 5%
Income Replacement Ratio: 75%
Mortality Age: 85

When Should You Start Your Retirement Plan

The answer is simple: as soon as possible! Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. That’s because the sooner you begin saving, the more time your money has to grow. Each year’s gains can generate their own gains the next year – a powerful wealth-building phenomenon known as compounding.

Here’s an example of what a big difference starting young can make: Let’s look at Bruce and Shiela’s retirement contributions. Shiela starts at age 22, and puts aside R 25 000 a year in a Retirement Annuity for 10 years – and then she stops saving – completely. By the time Shiela reaches 65, her R 250 000 investment will have grown to R 11 197 012 (assuming a 10% annual return), even though she didn’t contribute a cent beyond age 32.

Now let’s see what Bruce did. Bruce puts off saving until he turns 32 and then saves R 25 000 a year for 34 years. By the time he reaches 65, he will have set aside R 850 000, but it will grow to only R 6 750 609, assuming the same 10% annual return. That’s a huge difference.

Benefits of Investing In a Retirement Annuity

Boosts your retirement savings

Few people save sufficiently through an employer retirement fund to allow them to retire comfortably. A Retirement Annuity (RA) can boost your other retirement savings to ensure that you’re able to maintain your standard of living in retirement.

Tax Efficiency

Contributions to your RA are tax-deductible up to a prescribed maximum. For example, if you pay a 41% marginal tax rate and invest R 10 000 in an RA, R 4 100 of that amount may effectively be paid back to you by SARS.

Not only can you deduct your contribution, but the investment return on the RA – this is the income and dividends on your investment – will not be taxed either.

Disciplined Savings

You can only access your retirement annuity when you reach the age of 55. This prevents you from withdrawing money from your RA prematurely – a good means of forcing you into disciplined saving.

Protection From Creditors

In addition, should you ever fall on hard times, your RA is protected. In the event of you going insolvent, the full amount of your RA is protected from creditors.

Estate Planning

Estate duty refers to a tax of 20% that is levied on the estate of a deceased person. The funds in your RA do not form part of your estate when you die. This means that there will be no estate duty payable on your RA. The money in your RA will not be handled by the executor of your estate and will therefore also be excluded from executor fee calculations.

Starting Your Retirement Plan

Consult an Independent Financial Adviser for advice on how you can reach your retirement goals. It is important to take a holistic view when creating your retirement plan.

Our Independent Financial Advisers specialise in matching your needs with the right investments.