6 "Catch-up" Strategies for Retirement

Saving for Retirement is often overlooked by the majority of people until it is too late. This happens to the best of us since we are too busy focusing on paying our debt, settling our bonds, ensuring that our children’s education is paid for, having annual family holidays, and really not paying attention to how much money we have saved up for retirement. The majority of people will start panicking 10-15 years before retirement, realising that they do not have sufficient money to retire on. Do not fear, it’s never too late to start saving, although it comes with pain and requires a lot of discipline.

Here are some strategies you can put in place NOW to ensure a comfortable and sustainable retirement:

 #1 – Establish how much you will need to live

Take time to sit with your partner and Financial Advisor to project your future income needs. Many people are scared to find out the truth about their retirement income, but others are actually in a better off place than they think they are. This exercise will help you to  look into your future financial picture realistically. This is the first step towards successful retirement.

There are also financial planning tools, like a retirement calculator, that can help you project your future income needs. If you would like to retire at age 65 and want X amount of income (you plug in your desired income), the tool will factor in what you already have saved, your current saving rate, and if you will be in a good place for retirement. You can use this as a benchmark for how much you should be saving.

 #2 - Boost your savings

Figuring out how much you should have saved is tough. The general rule of thumb in South Africa is that you’ll need to be able to replace 75% of your income to retire comfortably. This assumption relies on the fact that you won’t have a home loan or any other large debt at that stage, which means your monthly expenses will be lower. But, increasingly, financial planners are beginning to work on a 90% replacement ratio, especially since medical expenses tend to rise after retirement.

Assume you are retiring today with a final salary of R40 000 a month (R480 000 a year). To replace 90% of your salary, you would need R8,640,000.00 saved to maintain your standard of living.

So, if you’re nearing retirement and you’ve come to the conclusion that you need more savings to retire comfortably, the easiest way to solve this problem is to save more. Aim to save at least a quarter of your net income. This is not easy and to do so you’re going to need to ruthlessly cut back on your expenses, at the same time adding to your retirement fund. Saving an extra R1 000 a week on a salary of R40 000 a month will make a big difference.

In 2016, the government increased the annual tax allowable contribution rate to 27.50% for individuals subject to a maximum of R350,000.00 per annum. You can use this opportunity of getting a tax deduction by increasing either your contributions within your Employer sponsored fund or to your individual Retirement Annuity.

With the introduction of Tax Free Savings Schemes, this also can be utilized as a way of accumulating discretionary money for retirement.

#3 - Aggressive Investment

You’ll also need to be more aggressive when it comes to investing. A generally accepted rule has been to subtract your current age from 100 and have that percentage of your portfolio invested in equities – although these days many financial advisers advocate for the “110 rule” because we’re living longer. So, at age 30, you’d have 80%, at age 40, 70%, and so on. This de-risks your portfolio as you get older. You can’t afford a 50% crash in the markets at age 60! If you start saving too late (or don’t have enough saved), you’re going to have to increase the equity portion of your portfolio. Consult a financial adviser though - the last thing you want is to make an uninformed decision and take unnecessary risk.

#4 - Never Cash Out

Never cash out. One of the large financial intermediary houses said that 93.5% of its clients who exited from their Retirement Funds in 2013 opted to take cash rather than preserve their benefits. You can access savings in products like preservation funds and retirement annuities at age 55. At this stage, make sure your money stays invested. Withdrawals from some products force you to purchase an annuity at that stage. Don’t be tempted to use your money for non-essentials. You should be adding to your savings rather than eroding them.

 #5 - You should Not Draw more than 5% of your Retirement Capital

This is a good rule of thumb and while some experts would recommend going lower than the 5% figure, just because you have the money in the account doesn’t mean you should be withdrawing large amounts of money on a regular basis. Be careful; put yourself on a budget where you are only withdrawing 4-5% from your Retirement Capital per year. Assume you’re retiring today on a Retirement Capital of R10,2 million, your recommended Capital drawdown per annum is R 42,500.00 per month.

#6 - You can Work Longer

Finally, there’s also the option of working longer. But you don’t want to be in a situation where you’re forced to do so. Because we’re living longer, it’s not uncommon to continue working (even part-time) into your seventies. Will the concept of retirement even exist in a decade or two? Still – even if we stretch our working lives substantially in decades to come, surely, it’s better to rather have saved a large amount of money, than not?

Whether you are 35 or 55, it’s never too late to start saving for retirement. By using the strategies, I have discussed, you will develop a greater sense of confidence about your retirement independence and security, knowing you are doing your part to help ensure a stress-free retirement.

November 14 2017 By Lebogang Makgamatho Retirement Planning, Financial Planning