Millions of South Africans are heading towards an insecure retirement. This is because they are likely to run out of money before they run out of time.
Millions of South Africans are heading towards an insecure retirement. This is because they are likely to run out of money before they run out of time.
Investing for retirement is not typically something a young, newly independent adult would focus on, especially in this age of instant gratification.
But it should be.
It is understandable that it is far easier to spend money on tangible commodities than on an intangible concept that will occur in the distant and uncertain future. Although it is never too late to start saving for retirement, the earlier this becomes a priority, the better.
Time in the stock market, together with the miracle of compound interest, the so-called 8th wonder of the world, is an investor’s best friend.
A growing number of South Africans believe they will be able to survive on meagre government grants and support when they retire. Even members of pension or provident funds live with the false sense of security that once they retire all their financial needs will be met.
According to a recent paper produced by National Treasury, only 6% of people on retirement funds will be able to maintain their pre-retirement lifestyle once they retire. This is partly because many people tend to cash in and spend a substantial portion of their retirement benefits as soon as they have access to the funds.
But the primary reason is that most South Africans, regardless of whether or not they are already contributing to some form of retirement fund, do not save enough, for long enough, to live out their golden years in comfort.
Although there are a number of ways to save for retirement, recent changes to tax legislation have made the retirement annuity product a very effective instrument for retirement planning purposes, especially in light of recent tax deductibility changes announced by the Minister of Finance.
This previously maligned product has now been significantly restructured, making it one of the most attractive, tax-efficient savings products available. Individuals are able to invest in a retirement annuity irrespective whether or not they are already a member of an employer-sponsored pension or provident fund.
Retirement annuities have now become virtual tax havens, with tax deductible premiums (within certain limits) and the growth of the fund being free of both dividend withholding tax and capital gains tax.
Retirement should be a time to be enjoyed, not a time to be feared.
Proper financial planning and disciplined saving are therefore key elements to ensure self-sufficiency at that stage of a person’s life. The alternative would be unpleasant, with the retiree having to impose on others or family members for support. This is currently happening so much all over the world that social scientists are referring to the current adult generation as the “sandwich generation” due to their having to provide for their own young families, as well as for their parents.
In today’s economic climate, it is extremely challenging from a financial perspective being the ham in this type of sandwich.
Rands and Sense is a monthly column, written by Ross Marriner, a partner in the firm Whiteleys Accountants and a financial planner with PSG Albany.
