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 prioritized 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.
Failing to plan is planning to failing, this is hard fact and something we do not want to hear if we haven’t started saving for retirement. Every year we put off saving reduces our options and increases the sacrifrice we will need to make. Each year we will either need to save more to achieve our retirement goal or we need to start adjusting our lifestyle and getting used to living off of less.
We will be going through retirement planning through different life stages and touching on what you should do during each one.
Retirement Planning for 20 to 30 year olds
What does this age group find important?
During this decade of life, most people are finishing up their tertiary education and starting their professional career. Building up experience, knowledge and skills, usually with the focus to progress in their career.
20s – 30s usually they look to sort out accommodation, a vehicle to get around in as well as try and live life to the fullest in terms of creating memories and experiences. If you are in this bracket you have energy and ideas and likely very little responsibilities.
A large portion of this group’s income is spent on leisure as they see retirement being unimportant and a very long time away.
What should this age group focus on?
It is important for this group to establish the habit of saving. In order to get a good start of retirement saving, it is advised to start saving between 12%-20% of your monthly salary.
An important concept to understand is the power of compound interest and the benefits of starting to save early. This group needs to be encouraged to save a portion of their salary, even if it’s not a lot, so they can form the discipline of saving and benefit from compound growth. As they get older, and their salary increases, it will then be easier to increase their savings.
Retirement Planning for 30 to 40 year olds
What does this age group find important?
During this decade, starting a family and settling down is usually the focus.
They have settled into their current career position and now shift their focus into family and asset accumulation. They are now aware of the cost of things and retirement is looking like a reality. Most people by now have started saving for retirement and all them wish they started earlier.
Taking out mortgages, financing vehicles and saving for their children’s education needs are some of the most important responsibilities during this decade. Insurance also becomes very important for this group with dependents like children, parents or both. They have responsibilities and if you are in this category you most likely are dependent on your income or your partners income.
What should this group focus on?
The focus during these years should be on saving as much as possible towards retirement so that they can minimise the burden closer to retirement.
Ideally, by the end of this decade, you should have around 3x your annual salary already saved. This is a guideline and not an exact goal.
During this time it is important to have an emergency fund of at least 3-6 months worth of expenses on hand. Also, make the most of the tax deductions and tax-savings that are on offer such as Retirement Annuities and Tax Free Savings accounts.
Making contributions to these investment vehicles can help enormously over the long term.
If you haven’t drafted a will, now is the time to get one.
Retirement Planning for 40 to 50 year olds
What does this age group find important?
During this decade it is important to make sure your financial plan starts to include more detailed information about your capital needs and expenses. Hopefully, with an emergency fund, medical aid and insurance there are no hiccups in your planning.
By this stage in life, most people are looking to settle their large debts such as mortgages, buy cars cash rather than on credit, making sure all their children’s education needs are met. Hopefully, you are not splurging on a mid-life crisis.
Jokes aside, many people in this group struggle with the tendency of spending more as their income reaches its peak.
It’s important to stick to your ‘plan’ and stay disciplined in savings towards their retirement need. By now, many people have the opportunity to save some extra income or settle debt. This is where there is a chance to play catch up. If behind on your retirement goals you are probably wishing you started sooner.
What should this group focus on?
This group should focus on sitting down with their financial advisor and doing a retirement plan with a strong focus on retirement needs and the practical changes you would like to make in the years to come. As you near retirement it is both easier and more important to focus on the details. Shortfalls are becoming a reality.
The one positive is that there is still time to make adjustments that can make a big difference in future outcomes.
You also need to start thinking about the potential increase in medical expenses. Evaluate your health and life expectancy and draft a cash flow projection. With +- 15 years till retirement, it is imperative to refrain from going too conservative with asset allocation – you would still want to achieve more growth up until retirement.
Retirement Planning for 50 to retirement
What does this age group find important?
During this decade, the plan retirement plan should be well-known. Making sure that retirement is in order and that there is sufficient capital available to fund retirement is the most important aspect.
As retirement creeps around the corner, most people realize that their pay checks are numbered and therefore spending it wisely. A lot of expenses that they had before such as debt and children have fallen away which means that more can go into savings or leisure (if they are already on track for retirement).
What should this group focus on?
It is very important for this group to focus on making sure they don’t have a shortfall at retirement.
If reality only kicks in during these years and you realise you are not on track to retire comfortably. You need to make major adjustments. Reducing your expectation and retirment income need, postponing retirement or even looking for post-retirement employment are some of the options available.
If you have planned well and are still on track you could void taking on additional risks as it could have a large impact on their retirement plan. You should be settling and avoiding all forms of debt. Working with an advisor and taking calculated risks is highly advised during the years leading up to retirement.
Eash person and plan is unique and it is crucial to seek independent advice at regular intervals. Being an ostrich with your head in the sand is possibly the worst strategy you can adopt.
Be practical, think and reflect on your current situation. Aligning your wants and needs is essential to obtaining a comfortable and successful retirement.
In the next few articles we will be unpacking each life stage in a little more detail.
Certain retirement investment have tax deducstion while saving money, they can essentially help you save more of your hard earned money instead of it going towards paying tax.
These investments are structured to encourage you to save towards retirement so that you have enough to retire and live comfortably.
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 a lump sum from retirement products 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
A retirement annuity is an extremely tax efficient way to save for retirement. They are attractive because of the significant tax deduction.
A tax-free savings investment is an investment that grows without any tax. Ordinary investments will trigger capital gains tax, dividends and interest. A tax free, as the names suggests, has no tax.
