THE BIG R
For some, the big R is a topic they would rather just ignore and not think about until it’s too late! What am I talking about? Our retirement! Let’s face it, no one has said the words “I have too much money at retirement” … ever!
When is the best time to start saving for your retirement? My answer is: Today!
You see, the sooner you start contributing, the sooner you can see the effects of compound interest. Here is an example:
Let’s assume you are 24 years old and decided to contribute R500 per month, increasing with 10% per annum until the age of 65. We assume a growth of 10%, with inflation being 6%. You can look forward to an income at retirement from age 65 till age 90 of R4,360.00 per month (in today’s buying power) escalating with 6% per annum. Not much, right?
So let’s assume you contribute a little more each month. R1500 per month with the same assumed growth and inflation as above, you can look forward to an income of R13,100.00 per month until the age of 90. Much better, right? The effects of compound interest on a larger amount over a longer period has far more benefits than waiting to contribute much later.
I believe Retirement Annuities got a bad rap in the past because of inadequate planning and annual revisions by the Advisors. But really, Retirement Annuities have so many wonderful advantages.
What are the advantages of a Retirement Annuity?
• The contribution is tax deductible within limits
• The funds are regulated to ensure there is a good split between asset classes
• 27.5% of your taxable income can be contributed towards an RA (maxed at R350,000 per year
• Any over contributions will roll over to the next tax year, so the tax benefit is never really lost if you over contribute
• An RA is safe from creditors
• The growth within the fund is tax free
• The funds are safe from unnecessary spending before retirement as it cannot be cashed before the age of 55
• Once at 55, 1/3 can be taken in cash up to R500,000 tax free and this can be re-invested in a platform investment from which you may also draw an income tax free
• The remaining 2/3’s, will have to be used to purchase an annuity – living or guaranteed – which will pay you an income. The income from here will be taxed according to the income bracket you fall in.
Planning sooner rather than later for retirement will also benefit your cash flow. If you leave it for later in life as most people do, you have to contribute a much larger amount to make up for lost time. Sadly, most South Africans cannot retire due to inadequate savings for retirement and improper ongoing planning. Any Investment must be reviewed annually to ensure you are on track.
Many clients are shocked when the projections are done on their current contributions or retirement savings, as proper planning was never a priority; however it is never a bad call to review as soon as possible.
We usually meet with our clients to discuss their needs at retirement, list their current income and expenses and discuss what type of lifestyle they envisage for themselves at retirement which will then determine what needs to be invested to reach that goal.
When you are young that picture is normally vague as it is a long way to retirement, but the rule is if you keep contributing the 27.5% and review annually you will be much better off at retirement than those who leave it for their late 30’s or 40’s.
If you would like to invest something each month, a Retirement Annuity is a good place to start and you can build your portfolio from there.
Contact me for any advice or assistance in this regard.