There are 3 mostly unpredictable events that will screw up your retirement planning:
· Resignation when you take the benefit in cash.
· And off coarse divorce.
Now that you are on a single income again, you need to re-think your retirement. Don’t count on Mr Right to help you with this.
- Settle your short term debt as soon as possible.
- Contribute towards a Retirement Annuity or a Tax Free Investments, keeping in mind that you could retire within the next 20 years.
- If you are able to settle a 20 year bond within 13 years, you will then have the amount of your bond re-payment to invest for your retirement.
- Never cash in your pension or provident funds.
- Should you have a divorce claim on your ex-spouse retirement funds, make sure that you transfer your benefit as soon as you have the divorce order.
When you claim your share from your ex-spouse's retirement fund you can transfer to a preservation fund tax free.
Once you are a member, you are able to make one full or partial withdrawal before retirement age of 55 years. Once you have made a partial withdrawal, the remaining balance cannot be accessed until retirement age. This option is subject to any requirements of the transferring fund and/or legislation. This should be your last option if you are in financial trouble.
How much do I need for retirement?
There are 2 resources in this word that are truly mismanaged – The one is TIME and the other is MONEY. The one you can save and the other you can invest, which sounds really easy to do but in reality most people do neither. Simply because it is something that is never structured or planned because living is so hard.
When you add these 2 resources together then you get what I call exponential growth.
Financially speaking it is called compound interest.
When people ask me “How much do I need for retirement?” my answer is always whatever you think it is – DOUBLE IT! Especially after divorce.
Now I can’t just say that without substantiating it? So let start with some statistics. It is fact that only 6% of people in South Africa can retire with the same standard of living and replace their income with their retirement capital - Ask my sister google.
The biggest pension fund administrator in South Africa will tell you that when you retire with 75% of your final salary, then you will be fine. if you are a salaried employee you should aim for 120% of your final salary.
A nightmare deferred.
We have all been taught or not taught by your parents, the nightmare creators – “Get a job, work hard and make sure you belong to a pension fund”. So what have you been taught? Effectively you have been taught linear financial planning. Linear means everything is determined in a straight line with ZERO exponents or curve balls.
So imagine you have R 1 mil in the bank and at current average interest rate of 6% you will earn R60 000 for the year or R5 000 per month. Your capital is therefore preserved at this “dining”? In other words you won’t eat into your capital but it is not keeping up with inflation. Wait, what about the tax? Oops forgot about that.
This is where it goes wrong?
Once you get to retirement there are a four things that will ruin your retirement;
· Medical Inflation
· And if you divorced halfway through your career you can add "time" as the biggest nightmare…it can’t be bought and it can’t be sold.
Inflation is just a bugger and one of the worst factors to deal with after retirement, just look at the impact of a drought and the effect it has had on potatoes during 2016. When a bag of potatoes goes from R30 to R90 a pocket, then you will learn very quickly that SARB manages inflation the actual “stat” with interest rates but they have very little control over prices. Retailers control the pricing.
Medical aids have become risk management tools controlled by the product provider. It is not designed to pay for “brille and pille”! Her is an example of a premium for a comprehensive medical aid, R4 953pm and of that R1 238 is allocated as savings. A few GP visits, a little over the counter medication and vitamins and your savings is spend and we all know that after age 65 we tend get a sick more often.
NHI – National Health Insurance is coming, this scheme will be paid for with taxes collected via SARS. I am sure you will remain on your private medical scheme and will be forced contribute to the NHI creating and additional expense.
When you work for an employer for 40 years they deduct your taxes every month and pay the PAYE over to SARS. When you retire you could consider yourself being self-employed having to live of your retirement capital, so as your own employer you are still liable for the tax on the income that you earn from your different investment vehicles.
Living longer is a manageable risk now that you know that your medical aid will pay for your stay in any hospital and that they are able to keep you alive as long as you have enough money. If the possibility already exist that you will live longer genetically or medically you should plan to retire with more capital than the 75% aim.
Have a look at the chart below if you are currently 40 year old there is a big probability that you will get to age 95. (b)
50% chance of reaching:
If these statistic scares you then you need to improve your retirement plan. The Queens Mother made it to age 104.
· Get an additional RA to just fund your medical expenses.
· Invest now in a TAX FREE investment to counter tax liabilities.
· Invest in higher risk equity type solutions that will outperform inflation.
· Perhaps ‘n second property?
You can consider retiring at a later a, perhaps 70 but then the South African market is not geared for older employees.
Make sure you update your skill so that you are able to work after retirement.
christel@ finsmart.co.za or email@example.com