Saving for Retirement – are you on the right track?

Imagine yourself at age 65 or 70. Retired. No longer earning a salary. Will you have enough money to maintain your current lifestyle? Or could you be facing real hardship – dependent on organisations like Tafta for accommodation, meals and even the personal hygiene products you need, like Mrs P?

If you’re counting on a government pension to sustain you in your golden years, think again. No one can live on R1 890 a month. It’s even below the national minimum wage! And although the old age grant is increased every year, the increase is below the inflation rate. Which means that state pensioners have been getting steadily poorer.

Saving for retirement

Looking ahead to a time when you will no longer be able to earn a living – even if you want to continue working – can be really frightening. If you struggle to save money now, while you are earning a salary, how on earth will you manage on what you’ve been able to save, in a future world where everything will be more expensive?

Saving for retirement is essential. And yet so few South Africans are saving enough. Current statistics reveal:

• Only 6% of the population is able to retire comfortably
• As many as 50% of South Africans don’t have a retirement plan, with women being less likely to save than men. Since women tend to live longer, this is extremely worrying.
• More than 55% of respondents in the 10X Investments survey said they do not have enough money at the end of the month to save.
• Many older South Africans are still supporting dependents, as well as themselves.
• Around 3.6 million people are dependent on the government old age grant of R1 890.

If you are worried about having enough money for your retirement, here are 5 ways to improve your situation:

1. Postpone your retirement date

   Who says you have to retire at age 65? Some companies insist on it, but many people in their sixties are fit and healthy and still have much to offer. Life expectancy has increased. Which means that if we stick to the retirement age introduced over a century ago, we may have many, many years of retirement to fund.

   If you’ve reached retirement age with insufficient savings, the best thing you can do is to work a few years longer. This not only gives you more time to save, but also decreases the number of years you’ll be dependent on your pension savings.

2. Resist the temptation to cash in your pension when you change jobs.

   Younger people, especially, are more likely to change jobs frequently. Leaving your place of employment usually comes with the option of taking your pension savings with you as a lump sum.

   Very few people have the discipline to reinvest the money in a Retirement Annuity; it’s all too easy to spend it. After all, you still have plenty of time to start saving again with a new pension plan. The truth is that it becomes more and more difficult to catch up and get your retirement savings back on track, as you erode all the advantages of compound interest (interest paid on interest).

3. Get advice

   Even people who consider themselves to be in touch with saving and the various options available, often know far less than they think when it comes to retirement savings. It makes sense to consult with a qualified financial adviser, who can help you make sound investment decisions to grow your retirement income.

   Professional financial advice is key to successful long-term savings and investments, yet fewer than 20% of South Africans have financial advisers.

4. Start saving now

   Even if you’ve left it a bit late, start saving something today. Set up a debit order so that your savings are deducted from your salary right at the beginning of the month, and adjust your spending habits so that you can manage on whatever is left.

   Don’t leave your savings till last and hope that there will be something left over at the end of the month to put away.

5. Take advantage of tax benefits

   If you invest in a retirement annuity or provident fund, SARS will reward you by charging you less tax – effectively helping to fund your golden years. You can save up to 27.5% of your taxable income, up to a maximum of R350 000 per year, making saving for retirement a lot less painful.

How much do you need to have saved to enjoy a comfortable retirement?

It’s the question everyone asks. And it’s difficult to answer. Apart from the fact that everyone’s circumstances are different, you also have to factor in unpredictable rates of inflation and fluctuating interest rates. Plus you have no idea how many years of retirement you will have to fund.

A good starting point is to base your calculations on your current take home pay. Experts predict that after retirement, you should be able to live on around 70% to 80% of this amount.

Spending less

If you currently earn R25 000 per month (R300 000 per annum) you should be able to manage on R240 000 per year after retirement. This assumes that you will spend less on transport and business attire. Your home or car may be paid off, or you may downsize. But you may also need to spend more on health care as you get older.

If you will be taking R240 000 per year out of your savings, you need to have amassed sufficient capital to generate this amount, or slightly more, in interest. In other words, the goal is to live off the interest on your savings, and retain the capital untouched.