Antony Hayes, the Gauteng retail marketing manager of Old Mutual, highlighted the advantages of starting early with a retirement plan, in the third report from the recent Old Mutual/Personal Finance Retire Right seminars.
The earlier you start saving for your retirement, the more likely you are to retire well, Antony Hayes says. There are steps you need to take to plan for a comfortable retirement.
Also, the sooner you start saving, the easier it becomes to cultivate a habit of saving and the more time you have to correct any problems that may crop up along the way.
Assuming you retire at the age of 65, Hayes says you will need to save about 20 percent of your pre-tax annual salary and invest that money at a return of 3.5 percent above inflation, to maintain your standard of living.
There are many ways to save for retirement, some of which you may already be doing.
Assess where you are
- Find out what kind of retirement fund you belong to.
If you are a permanent employee, the chances are that you belong to the company's pension or provident fund. You need to establish what kind of fund it is by asking for the fund rules.
A defined benefit fund guarantees you a pension that is a portion of your salary, so your employer carries the investment risk. Whereas with a defined contribution fund, which is also known as a money purchase scheme, you carry the risk.
A defined contribution provident fund is similar to a defined contribution pension fund, but the taxation is different. You cannot deduct your contributions to a defined contribution provident fund against taxable income every year, but you can take the entire retirement savings as a lump sum when you retire, and you are not required to buy a monthly pension with the money.
Your contribution to the defined contribution provident fund is also not taxed at retirement, but investment growth and your employer's contribution are taxed at retirement.
Ask about the split of contributions between retirement savings, death and disability cover and administrative costs, Hayes says. It is important to find out exactly how much money is going into the savings portion. This will determine how much more money you will need to save.
If you have the option of life cover, find out whether the sum quoted is the amount paid out before or after tax is deducted.
- Do you have a retirement annuity (RA) or a preservation fund?
Both work to secure your retirement savings when you leave your job and are unable to leave your money in the company's retirement fund.
An RA is voluntary and similar to a defined contribution pension fund.
Or you can move your pension fund money into a preservation fund, which has the same tax benefits as the pension or provident fund of which you were formerly a member.
Creditors cannot attach money in retirement annuities or preservation funds, so think long and hard before you use this money for anything other than retirement funding, Hayes says.
- Do you have an endowment policy or unit trusts?
An endowment is a savings plan through a life assurance company.
A unit trust offers a simple way to invest in the stock, bond and money market. Both are long-term investments. Find out what the charges are on whichever investment you have.
Also find out about the life cover offered with any endowments. These products generally have a life cover portion and you could be over-insured in that respect.
- What other assets and liabilities do you have?
A post-retirement medical scheme promise is worth its weight in gold, Hayes says. Look at your employment contract to find out whether your company will continue to subsidise your medical scheme contributions after you retire. If you do not have that option, you have to factor medical costs into your retirement savings, because you will have to pay the full medical scheme contribution.
Look at your car and bond repayments. These are long-term debts. You should aim to retire with no debts so that you do not have to use the tax-free lump sum from your pension fund payout to settle your debts, since this will diminish the amount of money you have for retirement.
Where do you want to be?
Decide when you want to retire and with how much money.
Choose whether you want to continue to enjoy the lifestyle you have led up until retirement or whether you are prepared to cut back, or whether you want to work until the day you die.
Your ideal may be to retire at the age of 45, but this is not always possible. A practical aim would be to retire at 65, with no debt and without taking a drop in income.
Another plan would be to retire at 55, with no debt and a 20 percent drop in income. Since you will not be putting money away for your savings anymore, this will make up for the 20 percent drop in income.
Constructing the plan
Express your plan as a portion of your income, Hayes says. You want to have about 14 times your projected annual salary in savings at the time of retirement.
This calculation is based on a rough estimate of the cost of buying a with-profit annuity from an insurer, Hayes says. The actual price of the annuity will vary depending on your gender and your spouse's age.
Using this rough estimate will ensure that you can continue drawing a pension equal to your annual salary.
If you want to retire at the age of 65, you have to save 20 percent of your gross annual salary with an investment return of 3.5 percent above inflation. Calculate the figures on a pre-tax basis.
Remember to include your spouse in your calculations and to consult a financial planner to check your sums.
The plan versus what you have
Now that you have totalled your assets, included your debt and allowed for taxation, you will probably realise there is a gap between what you have and what you should have.
To eliminate this gap:
- Weigh up the pros and cons of repaying your debt versus saving more for your retirement. Look at the taxation of both options and consider which one is going to save you in the long run;
- Look for cheap saving options, such as using the company retirement fund to save more money;
- Remember the importance of disability protection; and
- Have a back-up plan in case ou lose your job, to avoid using your retirement savings.
Now that you have a plan, all you have to do is implement it.
See also:
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