In our earlier blog, we had a brief look at the earlier life stages. We also unpacked what is important at each of these stages and what this group should be prioritising financially. In a nutshell, the 50 plus age group is generally enjoying a little more financial freedom, with slightly less family expenses, they should have a big focus on their retirement savings.
For those that are still earning an income, it is absolutely vital to be making the most of saving during this time, as for many, these are the last few years to earn an income. It’s also really important to be working closely with your financial advisor to make sure that your investments are invested in the correct type of funds and your retirement plans are on track.
Asset allocation and investment risk management are always important but as get closer to retirement this becomes more important. Taking on a high level of risk a year or two before you plan on retiring, is not ideal!
Seek independent advice to make sure you are still invested in the most suitable funds.
There are a few pitfalls that you should avoid during this phase of life and here are just a few examples (based on real life events).
Alan was 57 years old and his company is retrenching. As he is one of those closer to retirement, he is amongst those taking a severance package. He has been employed there for most of his working life, and his company has an employee pension plan, so he has always assumed his retirement is secured.
The company paid out his retirement savings. Between his severance package and his retirement payout, Alan is very excited about what is the largest amount of money his bank account has ever seen. He was not informed about the large amount of tax he had to pay on the lumpsum.
He decides that he should treat his wife to a little holiday before he resumes his job search and then planned to speak to someone about reinvesting his money.
After a trip of a lifetime to Europe, Alan started looking for another job but didn’t realise that it can be a little difficult to find a suitable position despite his huge amount of experience. The months start rolling on and he used his savings to help tide them over. After two years he manage to get some ad hoc consulting work.
It doesn’t pay what he was earning, but at least it’s some income. At this point he finally gets around to speaking to us and he invests the remaining capital.
Unfortunately, Alan only realised the impact is mistakes a few years later.
The sad truth is that Alan will not be the last person to make these mistakes but please don’t let this be you.
We have 3 things to highlight about Alan and his mistakes
- He should have started planning sooner – before we even look at the recent choices we need to point out that he was on the back foot from the first day he started to work. The contribution to his provident fund was too low to secure the retirement income he wanted. There was only 10% of what he was earning being invested each month and from day one he needed to increase this.
- By not immediately re-investing the payout he received, he has lost out on nearly two years of growth, as well as eaten into a large chunk of it for his living expenses while it was sitting in his bank account and was so easily accessible
- The overseas holiday was not planned for and he overspent tenfold on what he would normally spend. With the money in his bank account it was easier for him to overspend.
At the point of retirement, he was sitting in the position with only enough savings to cover his lifestyle for about 11 years. He is facing a dire situation. How can he make this work? What could he do now?
What could you do in situation like this?
There is no simple solution here or silver bullet. Living outside of our means or off of the money we still need to earn will catch up with us. A situation like Alan’s requires proactive steps adjustments.
Here are a few adjustments and changes you could consider.
- Immediately look at ways of cutting down on current spending and adjust lifestyle. The less he spends on a monthly basis, the longer his limited retirement savings can last. Could they maybe have dinner out just once a week instead of twice? Can they cut down on weekends away or groceries? Are there some pensioners specials he can maximise on?
- Are there any assets you can maybe look at selling to invest that money? E.g. perhaps he can share a car with his wife. Perhaps they could downscale to a smaller property that is cheaper to maintain and invest some of the money from their property sale.
- Can you earn other sources of income? He could look at going back to consulting work or mentoring students in his field of work. Or think out of the box at anything else to bring in some income?
- Work closely with a financial planner? Alan can make sure that the remaining money he does have, is in the best possible investment. A planner can also help with each of the above steps.
This scenario is unfortunately more common than it should be and a reality for many. Often they end up having to move in with their children and depend on them to provide even the basic essentials. For those of you that aren’t in this phase of life, please try and learn from and avoid some of these mistakes.
The thought of retirement when you are in your mid 20s is so far away but making the right financial choices, every step of the way, can change your life and future. With the right choices, you ultimately don’t have to become a burden on your family and can actually enjoy your retirement!
Saving for retirement is a responsibility we all have, so that we are able to take care of ourselves, and rely less on the people around us.
It is ultimately a healthy habit, that when prioritised from early on, results in enormous wealth creation through compounding interest. Retirement planning is always important but as you get older the strategy changes as your situations and circumstances change.
Read the blog here.
RSV’s (Retirement Savings Vehicles) are structured specifically for the public to save and have enough funds for when they retire while also reaping some tax benefits.
The Government wants you to save for retirement so that your future self does not rely on the government for pension.
Thus, they implemented tax benefits into RSV’s in order to encourage people to make use of these funds and become self-reliant.
Read the blog here.
Once you reach your desired retirement age (generally between age 55 and 70), you are able to retire from your RSV (Retirement Savings Vehicle).
You are allowed to take some of those funds as a lump sum and the remaining funds need to go into an annuity. Since the amendment to the provident funds act all the RSVs have been aligned.
This means that as of 1 March 2021, the maximum lump sum amount from your RSV is 1/3 of its value.
The remaining 2/3 have to be invested in an annuity which will provide you with an income during retirement.
These rules only apply if you have more than R247 500 across your RSV’s. If you have less, you are allowed to withdraw the entire amount as a lump sum
