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How to plan adequately for retirement from your 20s-40s

04 June 2021 Nirdev Desai, Head of Sales at PSG Wealth

Starting to save as early as possible (no matter what your age) is the best way to achieve your retirement goals. There is no substitute for this reality.

The longer you’re invested in the market, the more your accumulated savings will benefit from compound interest. If you start saving at age 25, you’ll need to put aside half as much in total, compared to if you only start at age 35 (and if you start at 45, you need to save even more to catch up to have sufficient savings to see you through your golden years).

Don’t use your debt situation or low income levels as an excuse to start saving later
Many people will claim to have other priorities that prohibit them from saving. Paying-off tertiary student debt or saving for a deposit for a home loan on top of paying rent are common excuses.

As income earners grow in their career, their lifestyles change, and with that their expenditure patterns. Instead of your student debt, you’ll have the school fees of your children, more expensive holidays, and increased medical costs at later stages of your life. Lifestyle creep is almost unavoidable, and the best way to provide for the future is to make saving a priority from the start.

Step one: Draw up a budget to stick to
Once you have decided on your financial goals and where retirement planning fits in to your broader financial plan, you should commit to a budget to prioritise expenses, and make this a way of life. There should be at least five elements in your budget; paying off debt, saving for the short-term, investing for the long-term, living expenses and the income leftover that should go into extra savings as often as possible.

Put yourself first
The best thing you can do for those around you, is take care of yourself. Planning for your retirement is crucial if you want to be among the 6% of South Africans who can retire without taking financial strain. Currently an individual can take advantage of annual retirement provision of 27.5% of their taxable income up to a maximum of R350 000, so keep tax advantages in mind while saving too.

You may not be earning consistently to your expected retirement age. An example is Covid-19’s effects on livelihoods – setbacks in your earning potential are real. Plan for these risks, and the potential irregularity of your income stream, to provide the required savings stream for retirement.

Be realistic about your retirement income
Be careful of increasing your retirement income expectation if your salary increases, as this will fundamentally change the savings requirements you need to meet. If you have been engaging with your financial adviser for some time, your expectations of a comfortable retirement should be well positioned in your financial plan. If you are behind, it’s not too late but you’ll need to commit to improving the outlook of your retirement by acting now.

Life expectancies are on the rise: are you financially prepared to live well into your nineties?
Data from the US shows that the life expectancy at age 45 for reasonably healthy individuals from middle income households is around 95. While every person is unique, advances in medical care bode well for longevity.

At age 45 it is expected that you should have approximately four times your annual salary saved up. Most South Africans don’t even have that much at the point of retirement, so it’s essential to start seeing your bigger picture, before it’s too late to improve it. Meeting with a qualified financial adviser can help ensure you are making the most of the time at your disposal.

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