Saving for retirement – are you on track?

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?

Latest statistics confirm that fewer than 7% of South Africans are on track to retire comfortably. Three out of four participants in the 10X Investments Retirement Reality Report 2023/2024 said they could not afford to save for their retirement, or could not save enough.

But what is enough?

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. This assumes that you will spend less on transport and business wear after retirement. In addition, your children will be self-sufficient and your car and home may be paid off.

However, you may have to spend more on health care as you get older. At current interest rates, you need around R1 million in the bank just to fund monthly medical aid premiums.

Start saving as early as possible

Even if you can’t afford to put away much each month, at least save something. Because, when it comes to savings, compound interest is your strongest ally. Simply put, it means you earn interest on your interest.

If you invest a lump sum in a saving account that pays 7% interest, your money would literally double in just over 10 years. If a parent or grandparent opened a savings account for you when you were born, and put just R200 into it every month, you could have around R250 000 in savings before you even start work!

Never too late to start

Although starting early is the best way to reach your retirement savings goal, it’s never too late to start. Don’t simply give up because you’ve left it a bit late in the day. Every rand you save now will help make your retirement more comfortable.

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

Postpone retirement

If you’ve reached retirement age with insufficient savings, the best thing you can do is to work a few years longer. If you aren’t allowed to stay on at your company past retirement age (or you don’t want to), consider starting your own ‘side hustle’ doing something you enjoy that can bring in extra cash.

This not only gives you more time to save, but also decreases the number of years you’ll be dependent on your pension savings.

Before  you retire

Aim to pay off your debts, car or home loan before you retire. Look at ways of cutting back on your expenses – for example holidays and meals out – and put the money into your retirement savings instead.

Be realistic about what you can afford. You may desperately want to give your daughter that dream wedding, or visit family overseas. But if  you use your retirement savings to make these dreams come true, it could come at the expense of your comfort and independence in later years.

Choose a savings plan that’s right for you

Many companies provide obligatory pension schemes or provident funds, and deduct contributions from your salary before you receive it. In some cases, both you and your employer contribute to the fund, helping your savings grow faster.

Rather than viewing the deduction as a ‘grudge’ expense, think of it as being an investment in your future security. For many people, their retirement fund benefit is the most significant financial asset accumulated during their lifetime.

Retirement Annuities (RAs) are personal pension plans you set up independently through your bank or providers like Old Mutual Sanlam, Allan Gray, or Momentum. You can open a RA whether or not you’re already contributing to a company pension scheme. Interest earned in a RA is tax free, although you will be taxed when you draw from the investment.

If you choose a Tax-Free Savings Account (TFSA), you’ll pay zero tax on interest or capital gains, up to R46 000 per year, with a lifetime limit of R500 000. Should you invest the full R46 000 allowed each year, you would reach the maximum R500 000 investment within 14 years, but there is no limit on how much interest you can earn on your savings and no tax is payable when you draw from your savings.

What is the two-pot system?

In September 2024, the two-pot retirement system introduced new rules governing investments in pension schemes, provident funds and RAs taken out after this date. Under the new system, withdrawing retirement savings when you resign or change jobs is no longer allowed.

Instead, one-third of your contributions go into a ‘savings pot’, from which you are allowed to draw once per tax year if you need to. The other two-thirds of your savings go into the ‘retirement pot’ which cannot be accessed until you retire, at which time all the money in this pot must be used to purchase an annuity (monthly pension).

Withdrawing money from your savings pot

You can withdraw any amount – from a minimum R2 000 to all the funds available in this pot – once a year. But withdrawal comes at a cost.  For example, if your marginal tax rate is 31%, a R10 000 withdrawal means you’ll pay R3 100 in tax. Plus, there are administrative processing fees of R250-R350 on top of that. You could be left with only around R6 500 to spend.

Also worth noting – your savings won’t just be short of the R10 000 you withdrew, but also the compound interest you would have earned over the years had you left the money in your ‘pot’.

Get expert 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 a qualified financial adviser, who can help you make sound investment decisions to ensure you’re able to retire comfortably.

The importance of saving for your retirement can’t be over-emphasised. When you no longer have a monthly pay cheque to cover expenses, life can get extremely difficult. Especially if you need professional care as you age.