A penny saved...

A penny saved…

Savvy financial planning can be the watershed separating a financially healthy retirement from a plunge in lifestyle. By Silke Colquhoun

A man says: ‘I certainly have enough money to live comfortably for the rest of my life. If I die by next Tuesday.’ Another man is told by his financial adviser: ‘Looking at your pension plan, I recommend you carry on working until you are 80. Get a second job, find a rich mistress. Or all three.’

There are plenty of retirement jokes, and while some are unfunny, all lean towards a black, fatalistic brand of humour that reflects the attitude most of us have when it comes to financing what should be our ‘golden’ or ‘sunset years’.

Growing old is not for sissies, even more so for those who depend on the national ‘old person’s grant’ of currently R1 420 per month.

In South Africa, only roughly a quarter (27%) of retirees will be able to retain their current standard of living, according to the Sanlam Benchmark Survey 2015. It reports apathy, unwise spending and misinformation among the current workforce: ‘Year-on-year we are astounded by the results that reveal the extent to which retirement benefits are being usurped by debt and ad hoc living expenses.’

So people are right to worry about their financial future. ‘In fact, they should start worrying much earlier,’ says Sara Herbert, the principal investment consultant at Old Mutual Corporate Consultants. She recalls an upsetting encounter with an elderly man who said if he had heard her presentation on retirement planning 20 years earlier, it might have prevented him financial hardship in old age.

Financial fitness

‘I consider saving for one’s retirement similar to a physical exercise plan,’ says Herbert. ‘You don’t want to do it, but you know you should. The earlier you start and the more you put in, the better the results.’ And while many people seem to manage to plod on by themselves with reasonable outcomes, most find it more effective with a coach or personal trainer – a role that a financial adviser takes on in retirement planning.

Business-1

But before entrusting your hard-earned rands to a coach/adviser, check that they are licensed by the Financial Services Board as required by law (fsb.co.za). Or if you value international qualifications, contact a trademarked CFP (certified financial planner) – who is comparable to a master builder in the construction sector – listed with the Financial Planning Institute of Southern Africa (fpi.co.za).

Your first step on the road to financial fitness should be a needs analysis that weighs up your income versus your spending, asking questions such as: What are your current household expenses? When do you want to retire? How much money will you need? Your property bond and children’s education may be paid off by then, but your health- care expenses generally increase with age. And while you may need less money for petrol and pin-striped suits once you quit work, you may require more to fulfil your retirement dream; be it travelling the world, golfing or spoiling your grandchildren. As a rule of thumb, you should aim to accrue a retirement income that is worth 75% of your salary before you retire.

Know your options

‘We all want the same thing: no risk and plenty of return,’ says Kristin van den Berg, investment adviser at financial services firm Personal Trust. ‘But there’s no secret recipe, no get-rich-quick fix. ‘You have to follow certain rules if you don’t want to rely on your family in your old age.’

In South Africa, there are currently three types of retirement products: provident fund, pension fund, and retirement annuity (RA). The first two are workplace-related retirement saving schemes that are based on an employer-employee relationship, whereas an RA targets the self-employed and those wanting to supplement their workplace pension.

Provident funds previously allowed their members to withdraw the full lump sum upon retirement, in contrast to RA and pension funds which only permit one-third as a cash payout. ‘That’s where problems were arising’, says van den Berg. ‘Provident fund members retired as early as 55, took the full cash payout and within a few years, had nothing left to spare for the remainder of their retirement. ‘With increasing life expectancy, your money has to last 30 years and longer.’ 

Retirement reform

The Tax Laws Amendment Act, effective since 1 March 2016, is harmonising the tax treatment of retirement funds. Provident fund members, for instance, previously did not receive any tax breaks for their contributions. Now they are treated like Pension and RA Fund members, who can invest 27.5% (up from 15%) of their income tax-free, capped at R350 000 annually. However, this only refers to contributions made after March 2016. There’s another amendment – deferred until 2018 – which will limit members to withdraw no more than one-third of their retirement savings as a lump sum and use the rest to provide a monthly income (annuity).

Business-3

This could be a traditional annuity – a conservative option, which gives you a fixed income for the rest of your life, but may be subject to inflation risk and ends on the death of the member and possibly their spouse. Or it could be a living annuity – a flexible but riskier option that is popular with more affluent retirees, who are able to choose their annual withdrawal amount (between 2.5% and 17.5%). The annuity’s capital could run out during their lifetime, but it could also grow further and leave a nice inheritance.

Either way, it is crucial to first build up your savings pot. One effective way is to make regular monthly contributions and lump-sum payments into a retirement annuity. ‘It is essentially a “wrapper” that regulates what you’re allowed to do with your investment,’ says van den Berg. ‘Your RA investments are governed by the Pension Fund Act, specifically Regulation 28, which will ensure that you invest in a diversified portfolio that’s not too risky and gives you the growth that you require. ‘For example, you may only have 75% in equity, 10% in property and 25% offshore.’

Herbert comments: ‘Obviously you shouldn’t take silly risks when investing, but don’t be too conservative. The goal is to outperform inflation by a significant amount for your retirement benefit to actually grow.’

If you achieve this, you will not have to work until you are 80, get a second job, find a rich lover or die next Tuesday. With a bit of planning and financial discipline, you should be able to sit back and enjoy your golden years.

Photography: Gallo/GettyImages
April/May 2016

Article written by