Financial checks to avoid the pitfalls
While the prospect of early retirement might be very enticing, the reality is that the majority of South Africans cannot afford to maintain the same standard of living in retirement as they do during their working lives.
This is the cautionary view of Tristan Naidoo from Old Mutual Personal Finance, who adds that South Africa unfortunately does not have a strong savings culture. “South Africans who are members of their mandatory company pension fund benefit from this disciplined savings opportunity. Nevertheless, we know that only about 8.3% of pension fund members have sufficient savings in their company retirement fund to be able to generate a pension of about 70% of their salary.”
This worrying statistic, gleaned from recent research* conducted by Old Mutual, should send a warning signal to everyone who is considering an early retirement option, says Naidoo, with reference to the recent announcement by the Finance Minister regarding Government’s decision to scale up early retirement with an offering (without penalties) to certain public servants.
“When considering early retirement, the first question should always be, ‘Can I own my future?’ In other words, do I know how electing for early retirement would impact my financial plan and my ability to retire comfortably?”
A tale of two critical elements
Naidoo says two critical elements to understand are firstly that your investment horizon would be shorter as you will have less time to accumulate your retirement savings, and secondly that your post-retirement years would be extended. So the impact of early retirement both reduces your retirement capital and increases the period over which the capital should last.
“If your retirement savings are sufficient, early retirement will be a great opportunity to enter the next exciting phase of your life. Unfortunately, making a wrong decision at this stage can have severe consequences, so it is vital that you speak to an accredited financial adviser who can help you with your plans and ensure you make sound investment decisions,” urges Naidoo.
Financial checklist before taking early retirement
Here are a few key checks to ensure consumers plan properly for their retirement and avoid the pitfalls along the way.
1. Get advice
Financial advisers can help you make sound investment decisions and grow your retirement income. In short, they can work with you to determine:
• how much capital you will need at retirement to retire comfortably by taking your circumstances into account
• how well you are on track with your retirement plan
• what the gap is and how you can close it, and
• other elements you need to consider, such as access to affordable medical care, illness and disability cover.
2. Set goals
Before you begin planning, get a clear, realistic picture of what you want your life to look like post-retirement. Thinking about when you want to retire, where you want to live and how much income you would need for your specific circumstance will help you paint this picture.
3. Weigh up your options
The traditional retirement savings vehicles consist of pension or provident funds, which is invested in via one’s employer, or a retirement annuity that is invested in through a financial services provider.
• Other than the traditional vehicles, there are also other investment solutions available, all of which may differ in terms of their respective structure.
• These options should be carefully weighed up, as a wrong decision can have a significant impact on how much money you will have each month after you retire.
• Don’t underestimate the importance of advice specific to your individual needs.
4. Understand the tax implications
The savings options would have tax implications, both during the investment term and upon its utilisation at retirement. It is therefore important to take time to unpack and understand the tax implications of all your options.
5. Take action
Decide on an appropriate financial plan and commit to it. Start today, even if you’ve left it a bit late.
6. Review and update
Revisit and update your retirement plan at least once a year with your adviser to make sure your investments are aligned to your goals, and that everything is on track. You also need to keep your adviser up to date with any changes in your life – such as a change in marital status or a new job – as this will impact your retirement plan.
Naidoo adds that the most important thing is to have a sound financial plan in place. “Early retirement can seem like an ideal opportunity to access your savings to fund various ventures. However, it is essential to remind yourself of the purpose for which you had saved, which was to cater for your needs at retirement. Therefore, if a portion of those savings is spent on something that was not originally planned for, it is important to make sure that you still have sufficient funds that can cater for your needs at retirement. This means taking stock of where you are, scanning the future, seeking advice and putting a plan in place to make your retirement as happy and secure as possible.”