Only 480 pay-cheques to go until retirement: Better get started!

Karen Wentzel, Head of Annuities at Sanlam Corporate

If you think you have thousands of paydays until retirement, think again. At age 25, with a retirement age of 65, you can expect just 480 more pay-cheques until retirement, at 35 around 360, at 45 around 240, at 55 around 120… “Thinking of your income as finite can be a wakeup call and is a very good reason to make every single month count,” says Karen Wentzel, Head of Annuities at Sanlam Corporate.

Unfortunately, most South Africans are not able to retire comfortably. Not starting to save for retirement early enough is a key reason for this. “It really is imperative to start young, if possible, and save what you can – small amounts make a massive difference thanks to the magic of compound interest,” says Wentzel.

Making every single pay-cheque count – both to save for the years when you won’t be working and to save for big life events like buying property – is an extremely astute way to build wealth and live a life of confidence.

A FORMULA FOR SUCCESS
Wentzel breaks down the percentage of a pay-cheque to try to save at various ages, plus the pros and cons of some savings vehicles. “An easy way to understand how much to save is to consider your retirement savings as a multiple of your current salary at different points in your life. The goal is to have a multiple of 15 times your annual salary saved at retirement.”

For example, if you’ve worked for five years and earn R240 000 per annum, you should have a multiple of 1.2 times your current annual salary saved, totalling R288 000.

This table is calculated on the assumption that you retire at 65, save 15% per annum of your annual salary (including an annual bonus), and earn investment returns of 10% a year, with salary increases of 6.5% each year.

Wentzel cautions that 15 is more than a number. For example, for each million that a 65-year-old saves, a male will receive a monthly pension of about R7 000 per month and a woman – due to her longer life expectancy – will get R6 000, growing with inflation each year. So, a person needs to save 15 times their final salary to afford an inflation-linked annuity at age 65.

What to do when switching jobs?
In the instance of unemployment or when switching jobs, the most important rule is to not withdraw your money, but to preserve it in a preservation fund. Once you cash out your savings, tax is payable if the savings exceed the tax-free limit. You’ll need to contribute much more each month to play catch up if you start saving later. Here’s the percentage of your salary you’ll need to save:

So, if you cash out your retirement savings at age 45, you will need to contribute 43% of your savings when you start a job again (at age 45) to retire at age 65 with financial freedom.

What if you’re self-employed?
If you’re self-employed with unpredictable pay-cheques, consider committing to a lower percentage saving in your provident fund, e.g., 10%, and try to save the extra 5% in other, more flexible financial vehicles where your contributions can fluctuate. You may also consider building up a share portfolio. Make sure to make full use of the tax advantage of investing up to 27.5% or R350 000 per year.

Sidebars:
Choosing the right vehicles to supplement your retirement savings is very important. In addition to a traditional pension or provident fund or retirement annuity, it may well be worth exploring these options:
• tax-free investments
• unit trusts
• online share account or a
• government retail bonds

Here are the advantages and disadvantages of alternative products:

Tax Free Investments
These were introduced in March 2015 as an incentive to encourage household savings.

Pros:
- No income tax, dividends tax or capital gains tax on the returns from these investments.
- A range of investments are available including investments in fixed deposits, unit trusts (collective investment schemes), retail savings bonds, linked investment products and exchange traded funds (ETFs) that are classified as collective investment schemes

Cons:
- You can only contribute a maximum of R36 000 per tax year (annual limit)
- There is a lifetime limit of R500 000 per person
- If a person exceeds the limits, there is a penalty of 40% of the excess amount

Unit trusts
These are portfolios of assets – for example equities, bonds, cash, and listed property – in which investors can buy units. This investment vehicle allows investors to spread their risk, whilst getting the benefits of professional fund management.

Pros:
- Unit trusts are flexible investments with a wide variety of option to invest in
- It helps with diversification of investments and allows 100% investment in equities
- Unit trusts can be set up as a regular savings programme
- Your resources are pooled with other investors, allowing you to make investments impossible as an individual investor
- You get the benefits of greater economies of scale, such as reduced transaction costs

Cons:
- There are costs over and above those you'd pay if you were investing directly
- No tax incentive on unit trusts

An online share account
This is an investment platform for trading (buying/selling) financial securities or currencies with the use of a brokerage's internet-based trading platform.

Pros:
- Easy access to trading shares in real-time
- It is easy to open and manage an account without geographical limitations

Cons:
- Online trading is risky if the investor doesn’t have adequate knowledge of financial markets
- No tax incentive on unit trusts

Government retail bonds
These are a low-cost way to buy bonds, with one of the advantages being that the investment can be as low as R1000, with the investment term being 2,3 or 5 years. Inflation-linked government retail bonds are also available for investors who are worried about inflation.

Pros:
- Government retail bonds are a low-risk investment option as you are lending money to the government, with the chances of the South African government defaulting on this loan being low
- Retail bonds are easy to buy on the government retail bond’s website, or via the Post Office, branches of Pick n Pay or over the phone.
- The return on government retail bonds is known in advance, which means you can anticipate what income to expect over the term

Cons:
- No tax incentive on retail bonds except if it is part of a tax-free savings account

And when it comes to tax?
All contributions to pension, retirement annuity and provident funds can be deducted from your taxable income. The deduction is capped at a rate of 27.5% of the greater of remuneration and taxable income, to a maximum amount of R350 000 per year.

Despite the benefits of investing in a tax-free savings account, your pension, retirement annuity and provident funds can provide better tax savings, because contributions to these funds are tax-deductible to a maximum of R350 000 per year.

With both a tax-free savings account and a retirement fund, your savings grow free of dividends tax, income tax on interest, or capital gains tax, but your retirement fund has the advantage of also having tax-free contributions.

When choosing your retirement investment, it is important to consider the following:
• The investment vehicle (characteristics and tax treatment)
• The underlying investment options in the vehicle
• The after-tax investment return of the different investment options

It is important to review your retirement plan and investment options at least every 3-5 years, to see if your investment plan is still in line with your risk appetite. New generation products should also be considered and compared to your current products.