RETIREMENT: Five Smart Steps to a Secure Retirement
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“Estimates show that 94% of South Africans won’t have enough money at retirement,” says Steven Nathan, chief executive of retirement investment specialists 10X Investments.
Nathan notes the two main reasons South Africans fail to save adequately for their retirement are low savings and high fees.
“But we can all achieve a financially secure retirement, as long as we understand how best to approach it and follow a few key steps.”
To start with, estimate how much you’re likely to need at retirement.
As a rule of thumb, the average South African should save enough to cover their final gross salary 12 times by the age of 65. You can use your present salary to estimate this amount in current money terms.
“So if you earn R100,000 a year as you approach the end of your working life, you would need to have R1,200,000 in retirement savings,” calculates Nathan.
To sock away that money, Nathan suggests the following five steps.
The sooner you start, the better.
The key advantage of starting to save at the same time you start working is that you have time to build your savings, little by little, over an average working life of about 40 years. Another advantage is that your savings benefit from compounding.
“Compounding means that you earn a return on your returns over time, which increases your savings even faster,” says Nathan. “In fact, the first ten years of a 40-year saving term can add as much as 70% to your nest egg.”
So no matter your age, start sooner rather than later.
But if you are starting later, have a strategy to enhance the value of your nest egg. You could, for instance, increase your monthly contribution or you could plan to retire later in life.
Aim to save 15% of your income.
Nathan recommends putting away 15% of your monthly salary to reach your retirement goal – remembering that your contribution will grow in line with your salary increases.
If you earn a gross salary of R10,000 a month, you should be saving R1,500 from every pay cheque.
“It may sound like a lot, but if you get into the habit of saving that amount and match your lifestyle to your net income, you won’t have to cut back later,” he explains. “The trick is to pay yourself first.”
If you cannot afford 15%, save what you can.
“Putting away a lesser amount diligently every month can still add up to a substantial asset after 40 years.”
Own the right asset mix for your age.
As a young person, you can afford to hold mainly shares in your investment mix, and be reasonably assured that you will earn a high real (after-inflation) return over time.
“Because time is on your side, you can ride out the periodic market corrections,” assures Nathan.
Near retirement, you no longer have this time. Nathan recommends mainly low risk assets such as cash and bonds, to preserve your accumulated wealth. Don’t speculate too much on equities at this stage, as there is no time to recover losses.
Know your fund options.
The ideal way to save is through a formal retirement fund governed by the Pension Funds Act – they allow for disciplined saving and offer attractive tax benefits that can increase your retirement investment by as much as 30% over a working life.
“First prize is your employer’s pension or provident fund.”
But this is not available to everyone.
“If you are self-employed, or your employer does not offer a workplace fund, consider a low-cost retirement annuity,” suggests Nathan.
Beware high fees.
Many retirement funds deliver poor results because of high fees, cautions Nathan, saying the average SA retirement annuity fund levies 3% in total fees every year.
“We advise people to find a retirement fund that charges no more than 1% in total fees annually, like the 10X Retirement Annuity Fund,” he adds.
Each 1% in fees saved increases your retirement fund by around 30%, which means 30% more income in retirement every month.
The bottom line, though, is that once you stop earning an income, you’ll no longer be able to save.
“And that’s when it truly is too late,” says Nathan.
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