By Carl Roothman, 25 April 2016
Your retirement years are something to look forward to. This is the time to spend with your grandchildren, pursue your hobbies full-time, or pursue whatever you find most fun and meaningful – at your own pace. But if you did not build up sufficient savings, this phase of your life could turn out to be highly stressful.
The sooner you start saving through your employer’s retirement fund or your private retirement annuity (RA) – or both – the better. It’s generally recommended that 20-somethings start saving 15% of their total income and continue to do so for at least 40 years to make sure they retire with enough. But if you start in your thirties or later, you would need to save a much larger percentage of your income every year to catch up.
The less tax you pay, the more money you have left to save. But to qualify for tax relief you need to choose the right type of investment product. With products governed by retirement law, such as an RA or your employer’s retirement fund, you can now invest up to 27.5% of your annual income and enjoy tax relief on those contributions. Contributing more to your employer’s fund means that you’ll see an immediate reduction in the amount of tax that’s deducted from your monthly salary. With an RA you’ll have to wait until your tax return has been processed to see whether you’re due a refund from SARS. The best thing to do with that refund is to reinvest it, of course.
For more information on exactly how much you can save towards a retirement product and enjoy tax relief, watch this video on T-Day, the day on which the tax laws for retirement products changed.
When you move from one employer to another you might be tempted to take all of your retirement savings as a cash pay-out, but remember the tax! Also, saving enough money for retirement is hard enough. Dipping into your savings at any stage could set you back significantly. The two most common tips that retirees have for younger generations are to start saving earlier and to preserve their savings every time they leave a job.
What should you do with your accumulated savings then? You have three options: a transfer to either an RA, a preservation fund or your new employer’s fund. You don’t pay any tax on a transfer to either an RA or a preservation fund. Once your money is in the preservation fund you’re allowed to make one (taxable) withdrawal should you run into financial difficulties, but with the RA you need to wait until your retirement date. You may decide to consolidate your retirement savings and transfer the money to your new employer’s fund so everything is in one savings pot. Just bear in mind that a provident-to-pension-fund transfer is not taxable, but a pension-to-provident-fund transfer is.
The closer you come to retirement the more important it becomes to consult a professional financial planner. He or she will be able to calculate the exact figure that you need at your desired retirement age and how much you need to save every year to reach that magic number. Equally important is the sound advice that you’ll receive to help you navigate the tax laws covering retirement products – both before and after retirement. We recommend that you speak to a financial planner rather sooner than later.
By working longer you’re able to save more towards retirement and it also means you’ll be living off your savings for a shorter period of time, enabling you to draw more retirement income every year. This living annuity table (page 2) provided by the Association for Savings and Investment SA is very useful to determine what percentage of your total savings you can withdraw if you want to maintain your income for a certain number of years. Postponing your retirement date is a great recipe for a more comfortable retirement.
Because there’s no guarantee that your savings will be able to keep up with your living costs throughout retirement (especially if you enjoy extraordinary longevity), it’s a good idea to start working on a hobby now that could supplement your retirement income later. Starting a second or even a third career after the age of 60 is becoming more common and can re-energise you and refill your savings pot. (Read more about fulfilling your dreams in retirement).
A financially carefree retirement is built through a sequence of sound decisions throughout your life. Start planning for the best time of your life now.