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Retirement Planning
Thursday, March 1, 2012
Different needs, same story

At the end of the tax year, retirement planning is highlighted as many clients are submitting their tax returns and working out ways in which to save on their tax. Retirement planning should hardly be seasonal but rather a lifelong commitment that starts with your first pay check and ends when you are enjoying a financially secure retirement.
Says Michelle Human, Legal marketing specialist at Liberty, “You may have a pension fund or a provident fund, a preservation fund or a retirement annuity, or even a combination of funds. What are the differences between the various funds and how should you be saving for your retirement?
“A pension or provident fund is a benefit offered by your employer,” she explains. “You, as the member, and possibly your employer, will make a contribution to the fund every month as part of your salary package. However, your membership of the fund is linked to your employment and if you leave you will normally leave the fund as well.
“In this case you would have the option to preserve your benefit or take the funds in cash, after the applicable tax has been deducted. If you choose to preserve your benefit, you could do so by transferring the funds to a preservation fund. This is a fund that will run in the same manner as your pension or provident fund, but is not linked to your employer.”
A retirement annuity on the other hand is a policy taken out individually. It is not linked to your employer and is fundamentally your own private retirement savings plan. You can contribute to your retirement annuity on a regular basis and add funds when you choose to, making it a flexible choice.
“In either of the above cases, the funds will be invested in an investment portfolio of your choice (subject to legislative limits),” she says, “which is hopefully in line with your risk profile, taking into account factors such as the number of years you still have to save until retirement and your risk appetite.” The funds will hopefully grow at a rate outperforming inflation, giving you a real return and accumulating capital.


One of the ways in which SARS encourages clients to save for their retirement, is by offering tax breaks. In the 2010 Budget Speech, the Minister of Finance announced that certain far-reaching changes could be expected to these tax breaks, which would have a significant impact especially on higher income earners. This included subjecting employer contributions to retirement funds to fringe benefit tax, limiting all retirement fund deductions to 22.5% of taxable income with a ceiling of R200 000 and restricting lump sums from provident funds to one third of the share of fund. These proposals have not yet been implemented and we await the outcome of further discussions for further clarity. “However, in the meantime it would be frivolous for us to waste the tax breaks that we do have, while we have them,” says Human.


 

“A quick calculation will show that you need at least ten times your annual salary at retirement in order to achieve 80% of that salary adjusted for inflation and so to maintain the same standard of living post retirement. You should be saving 18% of your monthly salary from age 25 if you invest it in a typical balanced fund (more if more conservative), and if you have left your retirement savings a bit later, this figure increases to a required saving of 40% if you are over 40 years of age.”
Looking at it from a different perspective: how many paydays do you have left before you retire and how many paydays are you saving for? The following example illustrates the point. A male client currently aged 40 has selected his retirement age as 60 years. Thus, he has 240 pay days left until retirement. At first glance, this seems like a lot of opportunities to save and plan for his retirement years. However, with a life expectancy of 75 years, he needs to provide for 180 paydays during retirement. It is clear that for the average client, this type of capital cannot be accumulated in a short period and requires years of contributions and compound growth in order to be sufficient.
“Whatever the reason for changing your job, it is stressful,” says Human. ‘In fact it is listed as one of the top five stressful life events. Changing jobs comes with some big decisions and a lot of paperwork. One decision that you will have to make is what to do with your pension or provident fund. It might be tempting to withdraw the funds and pay off your bond, take the kids on that holiday you have always wanted to or just settle a few odds and ends.
“But don’t be tempted to squander your fund benefits. The value of the compound interest you have earned in the fund, especially if you were with your previous employer for some time, should not be under estimated. Satisfying a short-term goal now could result in a significant shortfall at retirement. Speak to your financial advisor and consider transferring your pension or provident fund to a preservation fund.”
Retirement planning is something that unfortunately cannot be ticked off the list and then forgotten about until the day you retire, she says. It is a process that you will work on throughout your life and your plan needs to be flexible to change with your evolving circumstances. “Your plan will evolve as you move through the various stages of life, as your appetite for risk changes and as you get closer to retirement age.” Make the commitment to review your retirement plan at least once a year. Use this as an opportunity to not only take care of the housekeeping issues such as updating contact details and reviewing beneficiary details, but also to review your investment strategy and portfolio choices.
Leon Trotsky said that, “Old age is the most unexpected of all the things that can happen to a man.”
Somehow we have our whole lives to plan for this eventuality and yet we delay until it is just too late. Retirement planning is about planning for longevity and making sure that we have the funds in place to live out our retirement years with a comfortable standard of living and few financial worries.

Copyright © Insurance Times and Investments® Vol:25.3 1st March, 2012
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