Retirement planning:
Most people find themselves reaching retirement without having
done any preparation or planning.
The most of us strive to have financial independence at retirement.
Research has shown that only 3 out of every 10 South Africans
can retire financially independent at the age of 55 or 65.
The rest will have to rely on government pension scheme’s
or be dependent on other members of their families to support
them at old age, the majority will work till death even if
they are old and ill.
After working actively for years, we are sure without a doubt
you earn the reward to retire financially independent. Precise
and accurate financial planning will lay a platform for you
to build your future the right way.
The planning process:
It is very important to always have a plan, this will keep
you focused and determined to achieve you financial goals.
It is now the time to start that plan to work for you.
A Retirement Budget.
- At retirement, you would like to have al your debt paid
off and also have no one dependent on you.
- Remember that unforeseen events can have a devastating
impact on your finances and your income and expenses can
change.
- The budget must be designed to be flexible at times and
also be able to change investment strategies’: This
can be due to emergency medical costs, taxes, lifestyle
adjustments, inflation or living longer than expected.
- This also means that we need to have a suitable investment
that can give returns above inflation or we will have to
adjust our income to save as much to accommodate the cost
of living
- When making provision for retirement we must calculate
what the value of the desired income and what the capital
value of existing capital will be in the future.
This is where we identify and quantify the income and capital
you will need on retirement.
When we quantify a need in terms of how much we need and
set a date for when we need it, it becomes clear what your
goals are for retirement.
Important:
- There are different types of escalation we have to keep
in mind.
- The amount of how much our contribution escalates per
year. Atleast 3% -5% above inflation.
- The inflation escalation and fluctuation.
- The interest earned on our investments.
- Depending on where we invest. Past performance does not
give us the security or guarantee that the fund will always
perform as well; only where the fund has guarantees.
Look at what you are currently providing towards your retirement
savings
We can determine the additional amount of capital you will
need at retirement:
This can be used to set aside something we call 24/7 money.
When you need it you have at your finger tips, when its not
needed it grows with interest which can also later be used
to draw income from.
Time, inflation, and personal health is one of your biggest
threats when planning for your retirement.
Start by adding additional savings on the side to fund any
possible short falls.
Choose an investment plan that will suit your needs the best.
Investment Products:
Income Investments
The traditional method of securing a life-long annuity has
great merit. It will ensure that you get a guaranteed, inflation-linked
monthly income as long as you live. But that comes with concerns.
In today's low interest rate environment, your monthly income
rate will be low. In an effort to address this, many retirees
opt for Living annuities, which have higher risk than other
annuities.
Retirement annuities.
Like an Endowment policy you will be investing into a Retirement
Annuity.
The funds can not be drawn from until age 55 except if you
become disabled.
At the date of Retirement 1/3rd can be drawn as a lump sum
and the remaining 2/3rds must buy a compulsory annuity to
provide you with a post-retirement income, which will be fully
taxable at your marginal rate of tax.
Who should consider an RA fund?
You should consider saving for your retirement with an RA
fund if:
• You are self employed.
• You want to supplement your pension or provident fund
benefits.
• Your company does not offer a pension or provident
fund.
• You want to benefit from the tax benefits granted
on RA fund contributions.
Tax incentive to save for retirement
As an incentive from government to encourage you to save
for your retirement, your contributions to an RA fund are
tax deductible annually to a maximum of the greater of
• 15% of taxable non-retirement funding income or
• R3 500 less allowable pension fund contributions or
• R1 750
Contributions in excess of the annual tax-deductible amount
can be rolled over to the following year.
Must knows about RA funds
• You cannot make withdrawals from your RA fund prior
to retirement, making this a disciplined savings vehicle -
one of its most important advantages.
• RA funds are protected against most creditors, with
the exception of the Receiver of Revenue and a spouse or child
entitled to maintenance in terms of a court order. This is
especially important if you are self employed.
• New generation RA funds enable their members to choose
from a diverse range of underlying investments and also allow
switching between these underlying investments.
• You may contribute to your RA fund via a one-off lump
sum (single premium), regular premiums or ad hoc lump sum
instalments.
• RA funds accept transfers from approved pension, provident
and retirement annuity funds as well as voluntary contributions.
• If you have not been contributing the full tax deductible
amount for the tax year, you can inject your RA fund with
a lump sum payment at the end of the year.
• If you have been contributing more than the tax deductible
portion, you will be allowed to deduct, in future tax years,
the disallowed portion of this year's contributions.
• In the case of a life linked RA fund, the policy contract,
as well as the rules of the fund, may prohibit you from moving
your investment to an RA fund from another life or unit trust
company.
• You can extend your retirement date on a year-by-year
basis, letting your capital grow until you need it.
• You are able to choose the most cost efficient RA
fund, simply by comparing the Reduction in Yield (RIY) of
each fund. The RIY summarises all costs in one percentage.
The lower the RIY, the higher the maturity value.
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