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Retirement Planning
Friday, December 1, 2006
Is it too late?

The droll concept that life begins at 40 is no laughing matter to many South Africans who at that age experience the confidence-shattering trauma of some sort of a midlife crisis. Just when they need the coping skills to start out on a new financial journey, many men and women are stopped in their tracks by the realisation of how very hard they will need to save for a comfortable life once they have stopped work.

Now is the time for them to plan for retirement. Not actually retiring, but planning financially and emotionally for the time when they give up paid employment. Part of the dilemma for many people entering their fourth decade is whether or not to continue with school fees and bond payments or switch their children into cheaper education and downscale their properties.
Even for those free of debt and incumbent children, the dream of financial freedom may all too quickly be curtailed by escalating medical bills and the need to save furiously for a comfortable future.
“The fact is that, to avoid an income drop, from the age of 40 you must save 240 times what you will need in retirement. So, if you calculate your need at 65 to be R10,000 per month, you will have to accumulate R2.4 million retirement saving,” says Kenny Meiring, marketing strategist of retirement specialists, Metropolitan Employee Benefits.
Metropolitan EB suggests the following as a rule of thumb. Assuming that your investments will achieve a 2% real return (after inflation and costs), you will have to save R6 244 a month. This is obtained by dividing R2 400 000 by 384 (see table below).
Years to retirement Factor Monthly savings

Self employed

“While at all times it is recommended that people consult a qualified financial advisor, it is safe to say that a common mistake made by many of the self-employed is putting all their assets and savings into their business. While it is great for them to have such faith and optimism in their own venture, it remains a high-risk strategy. If the business fails they are then left with nothing,” says Mr Meiring.
A safer strategy would possibly be for a person to invest 15% of income into a retirement annuity. This amount will be tax deductible, which means that the receiver of revenue will be effectively paying 40% of the investment. If his business fails, creditors cannot attach the investment so, no matter what, his retirement would be secured.
For example, if a person’s business brings him R35 000 a month, he should contribute R5 250 a month into a retirement annuity (this being 15% of his monthly income). Because he pays tax at a rate of 40%, the receiver of revenue will give him a rebate of R2 100, since the premium paid on a retirement annuity is tax deductible within certain limits (R2 100 is 40% of R5 250).
The net result is that, for a real monthly investment outlay of R3 150, he will be getting R5 250 invested in a retirement annuity.
But there is still a shortfall in savings. Our original estimate indicated that he should be saving R6 244 a month while he is currently saving R5 250 a month.
He should therefore invest an additional R1 000 a month into unit trusts or a retirement annuity. While he won’t get immediate tax relief on the R1 000 premium, there are certain favourable tax consequences and the investment is also protected from creditors.

Employed

If an employed person is a member of his company’s pension fund he needs to contact the principal officer of the fund to find out what savings options are available to him.
Most funds work on the basis that a member contributes 7.5% of his salary and the company matches this with 7.5%. In addition to this, some funds allow members to make arrear contributions to the fund, and even additional voluntary contributions.
If the member earns R20 000 a month, say, then both he and his employer would contribute R1 500. This would give a total monthly retirement savings amount of R3 000.
This is less than half of our original savings estimate of R6 244. In fact there is a monthly savings shortfall of R3 244.
In order to make up this shortfall, Mr Meiring suggests the following:
• pay R145 a month in arrear contributions to his pension fund;
• make R150 a month additional voluntary contributions to this pension fund; and,
• take out a separate retirement annuity with a premium of R145 a month

This will reduce the savings shortfall to R2 804. He should then take out an endowment policy or invest in unit trusts.
For further information please contact Kenny Meiring on (021) 940 6359

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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