Time is not on your side when it comes to saving for retirement. Get your plan in shape now…
Save, save, and save!
Fri, 02 Dec 2005
This article is a printout from iafrica.com
Copyright © 2000 iafrica.com*, a division of Metropolis*
A 20-year-old has approximately 480 pay cheques to go before retirement. But a 30-year-old has only 360 pay cheques to go and a 50-year-old, only 120.
When you look at your retirement plan from this perspective, it is clear that time is not on your side. Experts say you should save 15 percent of your pre-tax income for 25 years to ensure financial independence in retirement, but in view of increasing life expectancies, you may need to save more than that.
The last thing on your mind
When you are between 20 and 30 years old, the last thing on your mind is retirement. It is easy to put off financial planning activities because 60 seems like a lifetime away. Also, a consultation with a financial planner may be a little intimidating. The myth that you have to be hugely wealthy to justify a financial advisor still prevails. This procrastination could mean the difference between comfort and poverty in your old age.
Don’t think that because you have a company pension you need not seek advice. Most people go into retirement under-funded despite having contributed to a corporate pension plan for years.
The sheer volume of products and services available to a would-be investor makes it virtually impossible to make an educated decision without help. Anyone earning a reasonable salary will benefit from consulting a professional to sort through the clutter.
Do some housekeeping
The first step to getting your finances on track is to do a little housekeeping first.
- Make sure you don’t have excessive credit.
- Identify your short-, medium- and long-term goals.
- Write them down so that you don’t leave out details when you see an advisor.
- Work out how much you can realistically save without having to use credit to make ends meet.
- If you can only save, say 10 percent of your salary at this stage, don’t let it prevent you from starting a plan. You can always increase it later.
What are your options?
Short term saving — one to three years
If you are saving money to buy a car, place the deposit on a house, pay for education or an overseas trip you should place your money in a saving account, fixed deposit or a money market fund.
This form of saving ensures that your capital is safe but the return on these types of investments will not normally beat inflation.
Medium-term saving — three to six years
When saving for an event that is three to six years in the future, you should try to achieve a return that is at least equal to inflation. Unit trusts offer almost every sensible choice from money market funds to bonds, property trusts and listed stocks. You can invest directly in unit trusts or via a linked product company like Momentum, Fairburn Capital or Sanlam Investment Management Services. Here, we are talking about discretionary investments with money that you’ve saved after paying income tax.
Long-term saving — six years or more
The most tax efficient way to save for the long-term is via a unit trust-linked retirement annuity. One of the benefits of this type of annuity is that it allows you more flexibility in choosing your investment.
Another benefit is that if you travel overseas for a year or two (or lose your job) premiums may be stopped or reduced at any time without penalties. This is not always the case with traditional life assurance retirement annuities. However, if you go this route, special attention must be paid to the fact that you are contributing within your tax-deferrable allowance.
A taxpayer is allowed to deduct the current and arrears contributions made as a member of a retirement annuity fund up to a specified maximum amount. You may claim as a deduction from your income contributions to a maximum of the greatest of:
- 15 percent of your non-pensionable income after deducting certain deductions allowable against this income and setting off assessed losses against this income, or
- R3500 less your deductible pension fund contributions, or
The most important thing you need to know about retirement saving is that you have to be totally committed to the plan. The markets will continue to fluctuate, and world calamities will continue to upset your strategies, but a solid strategy over your lifetime will ensure that financial freedom is achieved.