According to the Financial Sector Outlook Study (2022) – compiled by Genesis Analytics in
partnership with the Financial Sector Conduct Authority – only 12% of the 3.6 million individuals in the retired age group received a form of income in 2020. The study also revealed that more than 90% of
retirees can’t maintain their standard of living prior to retirement and two-thirds of members have less than R50 000 in their retirement funds.
We discuss the crucial topic of pre-retirement planning, highlighting the various options individuals can consider as they draw near to their retirement age. We delve deeply into the significance of initiating retirement planning early and examine a variety of financial tactics and investment alternatives to ensure a retirement that is both financially secure and personally rewarding.
According to the Global Retirement Index (2022), these are the top 10 retirement planning mistakes:
Planning for retirement should start the day you start your first job. The reality is that most South Africans only start planning for retirement when they are older – if at all. Starting the process well in advance will give you more time to save enough and plan to meet your goals.
Many people think retirement planning is only for the older generations, or that they are too young to concern themselves over something that will happen in the far future. These types of misconceptions result in people having to save a much bigger portion of their salary to catch up, usually at a time that they are struggling financially to keep their family afloat. All the top 10 retirement planning mistakes can be avoided if you speak to a financial planner when you are still young, and they partner with you throughout your career. These mistakes can be very costly and can set you back substantially. Some may bounce back but only with proper planning and discipline. Sadly, others don’t recover.
The first thing you need to do is conduct a thorough assessment of your current financial situation, including your savings, investments and outstanding debts. You also need to put together a list of your expenses today so that you can estimate what you expect your expenses to be at retirement.
Most financial advisors will tell you that you will need around 75 to 80% of your pre-retirement salary as an income in retirement. This depends on the lifestyle you want in retirement. Some people are happy to stay at home and live a moderate life while others would prefer to travel and see the world. Your personal aspirations will affect how much of your salary your retirement income will need to replace. That’s why it is so important to set goals, devise a financial plan to achieve them and then assess and review your plan at least once a year to achieve your retirement dreams. There are various handy online tools that you can use to calculate how much you need, just remember that they are used for illustrative purposes only. A professional financial advisor will be able to do more accurate calculations based on your personal circumstances.
There are different retirement savings vehicles in South Africa and abroad. In the table below we compare the main advantages and limitations of four of the most common savings vehicles to help you make informed decisions.
| Advantages | Limitations | |
| Pension funds | Your money is invested and can grow.When you retire, you can take one-third of your money as cash (less tax).If you pass away, your money doesn’t go into your estate.If you go bankrupt, this money can’t be touched. | You will only be able to access a portion of your money at different times during your career.You are taxed on withdrawal. |
| Retirement annuities | Your money is invested and can grow.When you retire, you can take one-third of your money as cash (less tax).If you pass away, your money doesn’t go into your estate.If you go bankrupt, this money can’t be touched.Annuities are tax-deductible – with certain limits. | If you want to access your money before age 55, you will have to pay penalties.Some annuities are expensive – not all. |
| Preservation funds | Your money is invested and can grow.You have different investment options.You can withdraw money from a preservation fund – but you only have one opportunity to do so.If you pass away, your money doesn’t go into your estate.If you go bankrupt, this money can’t be touched. | You can’t make ongoing contributions to a preservation fund.You are taxed on withdrawal. |
| Tax-free savings accounts | The growth you make is tax free.You can withdraw from this savings account at any time.You can contribute monthly or lump sums.A good choice for supplementing your retirement savings. | There are limits as to how much you can save in a year. You limit your lifetime contribution level if you withdraw money.If you exceed the savings limit, you will pay a penalty. |
Diversifying investment portfolios is an important strategy for managing risk and enhancing returns. With the South African economy facing economic instability and the global market shifts, relying on a single asset class can expose you to vulnerability. By spreading your investments across a range of assets like shares, bonds, real estate and commodities, you can mitigate the impact of market fluctuations or economic downturns. Diversifying acts as a safeguard, ensuring that the potential losses you experience in one sector can be offset by gains in another. Moreover, diversification optimises returns by capturing growth opportunities across various sectors that might perform well even when others underperform. A well-structured, diversified portfolio is an indispensable tool for navigating uncertainties while aiming for consistent, long-term financial success.
It isn’t easy to forecast your expenses – especially when retirement is still so far away. These questions will help you think about your future budget for retirement:
There are many other factors to consider, these questions will prompt you to develop a realistic retirement budget to maintain financial stability throughout your retirement years.
It’s important to remember that a budget is organic. It changes every month and even more so every year. Life has a way of taking unexpected turns. The best way to prepare for those unexpected turns is to manage your budget effectively, minimise your taxes where you can and put some money into an emergency savings account so that you are prepared for any eventuality.
There is real value in consulting with a professional financial advisor or retirement planner to create a personalised retirement plan. They are well-versed in the different retirement savings vehicles available in the market and can find the right option for you, at the right price, that matches your unique circumstances.
It is important to do your homework when you look for an accredited advisor. Don’t be scared to ask for their experience and credentials, request references and get quotes to compare their solutions. You are not seeking a once-off service, your adviser should partner with you for life – even into retirement.
Proactive pre-retirement planning empowers you to take control of your financial future and enjoy a fulfilling retirement with your family and friends. The effort you put in today will reflect in the rewards you reap during your retirement years.
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