How much income would you like once you’ve retired? Here’s how to achieve your goal
We have pointers on the options to consider when you’re planning for your retirement
Few people can retire comfortably in SA due to insufficient savings, the technical recession in the country and the low priority given to saving for retirement.
It’s important to consider your retirement prospects and what you can do today to ensure a more secure, financially stable future.
Here are some pointers to help you weigh your options when planning for your retirement.
Your income-in-retirement goal
Most retirement savings funds focus on maximising the accumulated contributions you make during your career. The most important thing is how your savings will translate into a sustainable income once you retire.
The goal is to ensure you live comfortably after you stop working. Let’s call this your income-in-retirement goal. Over a 40-year career, you receive about 480 pay cheques and you need to be strategic about using them to help you achieve this goal.
The sooner you start, the better
The sooner you start saving for retirement, the better. This is so that you can enjoy the full benefit of compound interest. As your invested savings earn interest, the interest is reinvested and also starts to earn interest, which grows significantly over time. The effect of compound interest is so powerful that over long periods, the amount of interest earned on contributions saved should far exceed the amount contributed.
This also highlights the challenging trade-off you need to make between money spent on “wants” before retirement versus money saved before retirement for “needs” after you stop working, such as essential medical care.
People are living longer and your savings may need to sustain you for many years into retirement.
Make the most of the options available to you at work
If the option is available to you, the best place to save for retirement is in your employer's retirement fund. These contributions make the most of the tax advantages offered to encourage retirement savings and are deducted from your salary and invested to earn interest until you retire.
If it’s a pension fund, up to 33% of your accumulated contributions can be taken in cash at retirement and the balance must be used to provide an income during retirement, highlighting the relevance of your income-in-retirement goal. If it’s a provident fund, all of your accumulated contributions can be taken in cash at retirement.
You should confirm with your human resources department that you are making the most of the options available to you to save – for example, by maximising the contributions you can make to the fund. If your employer doesn’t offer savings options, you can discuss alternative individual options with an accredited financial adviser.
Protect your savings
When changing jobs, do not be tempted to cash out the retirement savings from your former employer’s fund. Be disciplined, reinvest it in your new employer’s fund and enjoy the benefits of earning compound interest while staying focused on your income-in-retirement goal.
When faced with trials and tribulations, you may fall into the trap of thinking retirement planning can be put on hold. But the sooner you start planning for your income-in-retirement goal by making the most of any fund you’re a member of and saving as much as you can for as long as possible, the better off you will be.
This article was paid for by Liberty Group SA.