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Pension or provident fund not enough for retirement

23 November 2009 Marius Fenwick of Mazars Moores Rowland Financial Services

If you already belong to a pension or provident fund, you need to put at least a further 10% of your gross earnings towards your retirement, says Marius Fenwick of Mazars Moores Rowland Financial Services.

“The old rule of thumb for defined benefit funds was that if you had worked for 30 years you would retire on 60% of your income, and if you had worked for 35 years it would be 70% of your income.”

“Most people don’t have realistic expectations of what they can actually earn from a particular amount of capital,” says Fenwick.

The best way to figure out how much income you’ll get is to first calculate the value of your capital at retirement. “A person cannot expect to earn R10 000 of income per month at retirement on R300 000 of capital, as is often the case. If you work on a 10% drawdown, for example, for every R1 000 you’ll require as income you need R120 000 as an investment. Therefore for R10 000 of income one needs R1.2 million as an investment,” he says.

Whether such income will be taxed depends on how it’s been invested. If you’re drawing an income out of a pension fund, it will be taxed. But if it’s invested in a manner that declares dividends or some other vehicle, it’s not taxed, adds Fenwick. “If you’re in a living annuity it will be taxed, but the average tax rate on somebody who draws a R10 000 a month income and who is 65 years is very low.”

While most people need as much income as possible from their retirement savings, Fenwick says that drawing too much can erode one’s capital rapidly. “The older you get the more expensive things get and other needs such as medical expenses end up taking a massive chunk of your retirement income,” he says.

It is easier to fall into the trap of not saving enough for retirement, particularly as most people consider their home a fairly large chunk of their nest egg from which to provide a pension in the future by selling it and scaling down. Fenwick warns that this option often makes little difference as the actual transaction costs of selling and buying again often brings you to neutral – with no reserves.

“Downscaling sometimes is more expensive than staying put,” he says. “If you sell a property for R1 million you’re not likely to buy anything that you really want for less than R700 000. So after the transaction costs you’re left in almost the same position where you were before you sold your property in the first place,” Fenwick concludes.

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