Planning for retirement can be challenging, especially given the current economic uncertainties. However, achieving financial security in retirement is still possible with proper preparation, says Wouter Fourie - Ascor Independent Wealth Managers.
In an excerpt on Moneyweb, Fourie offers guidance to show whether you're financially ready for retirement, drawing from his book "The Ultimate Guide to Retirement in South Africa" co-written with Bruce Cameron, and introduces the new two-pot retirement system coming into effect on September 1, 2024.
Current State of Retirement Funds
In South Africa, around 15 million pensioners depend on retirement funds totalling R3.2 billion, yet fewer than 6% are financially secure. Key questions to consider include:
Have you saved sufficiently?
Can you manage if you live to 100?
Are you prepared for potential health issues?
Can you afford to retire comfortably?
Evaluating Your Retirement Readiness
Lifestyle Maintenance: Can you sustain your current lifestyle and retirement dreams? Are all debts paid off? Do you have adequate medical coverage?
Replacement Ratio: This measures how much of your pre-retirement salary your pension covers.
For example, if you earned R300,000 annually and your pension is R180,000, your replacement ratio is 60%. Most retirement funds aim for 60-75% after 40 years of contributions.
Is this enough?
The industry assumes that retirees need less money because they no longer save for retirement, enjoy greater tax relief, have paid off debts, and incur fewer work-related expenses.
However, this assumption may not hold for everyone. The gap between your retirement needs and the pension you receive is known as the “retirement gap”.
If there is a shortfall between your needs and your pension:
Increase savings: Boost your retirement contributions now.
Delay retirement: Postpone retiring to grow your savings.
Work part-time: Consider part-time work during retirement.
The Two-Pot Retirement System
Starting September 1, 2024, South Africa will implement the two-pot system:
Vested Component: Savings before the system starts remain untouched.
Savings Component: One-third of contributions can be withdrawn for emergencies, taxed at your marginal rate.
Retirement Component: Two-thirds of contributions are saved for retirement, ensuring long-term security.
This system introduces flexibility but requires careful management to avoid depleting funds too soon. Disciplined saving and strategic withdrawals are crucial.
Factors Affecting Retirement Lifestyle
Location: Living expenses vary by location.
Family Support: Financially supporting family members can strain your budget.
Healthcare: Choose between basic and comprehensive plans based on your needs.
Food and Travel: Eating out and extensive travel increase costs.
Transportation: Using public transport can be more economical than owning a car.
Lifestyle Choices: Opt for cost-effective choices and discounts to stretch your budget.
Preparing for the Unexpected. Considerations include:
Bequests: Leaving money for heirs impacts spending.
Longevity: Longer life expectancy requires more funds.
Dependants: Support for dependants can deplete savings.
Debt: Enter retirement debt-free.
Taxes: Estate and capital gains taxes can reduce inheritance.
Investment Returns and Inflation: Poor returns and high inflation can erode savings.
Calculating how much money you need in retirement is complex due to factors like investment returns, inflation, and health.
The table below illustrates how changes in inflation and interest rates affect the monthly pension (level annuity) purchased with R1 million by a male turning 60:
According to Moonstone, citing Coronation, nearly all life annuity purchases last year were fixed escalating annuities, while few retirees chose an inflation-linked annuity.
This preference is understandable, given the materially higher initial income from a fixed escalating annuity.
Proper retirement planning involves careful evaluation and regular adjustments. The two-pot system offers new flexibility but requires responsible management.
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