Retirement may be a long way off, but saving for it can’t start soon enough. We all want to retire in comfort and maintain our current lifestyle but due to insufficient planning and procrastination few people can afford to, and have to keep working or depend on their family during retirement. René Roux gives three suggestions to set you on the path to successful retirement saving.
1. Stop procrastinating
Retirement saving should be at the top of your financial priorities list. Because retirement may be many years away, it is easy to put off saving for it. However the longer you wait the harder it is to save enough as your monthly installments will need to be larger to meet your end goal. If you start saving now there will be more time for your money to grow due to compound interest (interest earned on interest).
If you have procrastinated: It’s not too late! Just seek professional advice, draw up a plan and start immediately. Pay your monthly retirement saving contribution first before any other expenses. Focus on clearing any debt so you can put that freed money towards your retirement saving.
2. Be realistic about how much retirement income you need
Today people are living longer due to medical advancements, which means you will need more income during retirement. It is unlikely that you will need your full salary during retirement as many expenses should decrease significantly. Hopefully you would have paid off your house so there will be no more bond repayments, your kids should be financially independent, you will stop paying retirement fund contributions, you won’t have work-related expenses and hopefully you’ll have no debt. However, certain expenses are likely to increase, such as medical cover, travel expenses and additional hobby and leisure costs.
Make sure you’ll have enough: This is where financial planning comes into play. Do your calculations and make sure you bond repayments are sufficient to ensure your house will be paid off when you retire, that you will be debt-free and that you have made provision for the expenses that are likely to increase during retirement. Be realistic about how much retirement living will cost and realise you may have to worker a bit longer. Remember to take inflation into account and be sure your income increases with inflation during retirement to cover the increases in expenses.
3. Take advantage of tax benefits
There are many ways to save for retirement. The most common vehicle is a retirement annuity (RA). An RA is a savings product specifically designed to help you save for retirement. You can make a single lump sum payment, or a series of payments over time (i.e. monthly contributions). An RA can be one of the most tax-efficient ways to save for retirement as your contributions are generally tax deductible and the growth in the fund is tax-free. Anyone can take out an RA and it is not affected if you change jobs. RAs are safe as they cannot be seized by creditors. It is a very disciplined way of saving because you cannot access the money until the age of 55. Upon retirement you can take one third of your retirement benefit as a lump sum and the rest will be paid out as a pension every month.
Take action: Because it’s for the long term this is an important decision and should not be taken lightly. But don’t be overwhelmed, a professional can help you decide on the best savings method for you. Don’t hesitate, take action and just start!
Sanlam Life Insurance Limited is a licensed Financial Services Provider.