Updated 08.05.2021

How to Plan Successfully for Retirement in Early Ages

We all reach retirement age at some point and being prepared requires some careful financial planning and discipline. Saving for retirement should start as soon as someone starts earning an income. To be able to retire comfortably, you need to think long term.

What is a retirement annuity?

A retirement annuity (RA) is an investment where individuals make monthly cash payments to ensure they have a regular retirement after retirement. Even if someone belongs to a company pension or provident fund, it is still important to invest in a retirement annuity as a supplementary source of retirement funding.

Give your money enough time to grow, and you start benefiting from compound interest. This is one of the best ways to make sure you’re financially secure in your retirement years.

A retirement annuity is one of the most tax-efficient investments you can make. If you pass away prior to retirement, your retirement annuity benefit is not subject to estate duty. Another advantage is that it is protected against the claims of creditors. If your business gets into trouble, your creditors cannot touch your RA.

Most retirement annuity platforms in South Africa offer portfolio managers the option to choose from a selection of local and international shares. As a direct share portfolio, this can be included in your retirement investment and be actively managed.

It’s well-known that shares held with a retirement annuity offer great potential for long-term growth. Investors are subject to certain restrictions in terms of what they can allocate to different asset classes. These restrictions are implemented to offer investment protection in volatile markets.

How much do you need to save?

Many experts recommend that you should use 80% of what you currently earn as a benchmark for what will need to cover your monthly expenses once you retire. If you currently earn R15 000 a month, this would mean a sum of at least R12 000 a month after retirement to maintain your current standard of living.

Compensating for inflation is important, or you could fall short of your required total. Inflation is difficult to calculate because you’re trying to calculate what will happen in the future. Exposing the money invested in your retirement annuity to assets such as shares helps to give investment returns that beat inflation.

ALSO LEARN: Top 9 Ways to Boost Your Retirement Savings

An online investment-and-retirement calculator can help you to understand exactly how much money you need to save based on your age and financial objectives. Calculators like this take into account issues such as the years left till retirement and inflation.

Why invest in a retirement fund?

Many young people don’t give much thought to saving for the future. It helps to start saving even a small amount of money from a young age. Over the long-term, compound interest can make a big difference to what you save.

You may have to cut back on a few luxuries to afford your monthly premium, but you will be very grateful someday that you had the discipline to do this.

Some people think they don’t make enough money to save for retirement. They don’t realise that even contributing a small amount to a retirement fund helps.

What happens when you reach retirement age in South Africa without having saved any money? You will receive a state pension of only R1620 a month. Contributing even a small amount to a retirement fund can make a difference and lessen dependence on social grants and family

Retirement quotes

Like any other major financial decision, investors need to do their homework in terms of the type of plan and the provider they choose. It is possible to compare retirement fund quotes online.

For a preliminary quote, you will need to give information such as your current age, your planned retirement age, your current taxable income per month and any current monthly contributions you’re already making to retirement funds.

When choosing a provider, it’s important to consider what type of services and benefits are offered. Free online tools may be made available for you to be able to keep track of your investment plan and keep it on course.

Fees charged to administer your retirement annuity

As an investor, you also need to be aware of the costs of managing a retirement annuity. Over the long-term, lower fees can make a significant difference to what you get out. Some providers will even give back most of the fees they’ve charged you if you remain invested until the end of your investment term.

Using a financial adviser

Planning for retirement is complex, and tax legislation changes all the time. This is why many people choose to use a financial adviser to help them structure a retirement plan in accordance with their needs so they can retire comfortably.

If you use a financial adviser, make sure to find someone reliable and trustworthy. Your adviser will conduct a full needs analysis of your financial affairs to gain a comprehensive understanding of your needs, wants and responsibilities.

Taxation on a retirement annuity

Investors can draw a third of their savings as a lump sum on retirement. If this sum is over the minimum threshold, it is subject to tax.

The rest of the retirement annuity must be transferred to a product that provides you with retirement income. If this income exceeds the tax threshold, you have to pay tax on the amount.

Reviewing your retirement plan

Annually reviewing your retirement plan is vital to make sure it’s on track. It is also important if there’s a change in circumstances, such as a divorce, purchase of a property, birth of a child or a sale of assets.

Concluding thoughts

If you are already contributing towards a pension fund or retirement annuity or pension fund, you have a good head start. If not, find out about the options best suited to your needs as soon as possible. The longer you wait, the harder you will have to work later in life to make up for the lost time.

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