There is a financial metric that says 50% of your money should be for living expenses, 30% should be spent on the things that provide you with enjoyment and fulfilment, and the remaining 20% should be allocated to savings.
If you are a Millennial, or a GenX, you may think retirement is a long way off. However, this is an opportunity to make sure you are on the right track when it comes to saving enough to maintain your lifestyle beyond the end of your working life.
Sadly, economists estimate that less than 10% of South Africans will be able to uphold their current standard of living after they retire. And the reality is that if you fail to save enough, you may become a burden to your family, or be forced to live off a government pension of just R1 700 a month. These are not attractive choices, so John Manyike, Head of Financial Education at Old Mutual, is providing advice to help you on the right track to keep living your best life.
“Ideally you should start saving for your retirement the moment you receive your first salary. If you have not done so, the best time to start saving - is today!” explains Manyike.
HOW MUCH DO YOU NEED TO SAVE TO MAINTAIN MY CURRENT LIFESTYLE INTO MY RETIREMENT YEARS?
The rule of thumb is that you will need around between 70% and 80% of your current monthly salary after you retire. So, if you’re earning R25 000 per month then you’ll need between R17 500 - R20 000 per month when you retire.
“For an easier way to see how much you should be saving each month at your age, try Old Mutual’s Retirement Calculator. This calculator takes into account many differentiators, such as your age, gender, and monthly income.
PENSION FUNDS VS PROVIDENT FUNDS VS RETIREMENT ANNUITIES
Chances are you are aware of all of the above, but just in case you haven’t, Manyike takes you through the options, so you select the right savings and investment vehicles for your needs.
1. PENSION FUNDS
When a company employs you, you can join a pension fund. Your money is managed by the trustees and they decide which assets to include in the fund. The contributions you and your employer make are tax deductible.
“Upon retiring, you may take up to a maximum of one-third of your savings in a cash lump sum. Just know that this cash lump sum is taxable,” he says.
Should you leave a company before you retire, you may have to move your retirement savings out of the company fund, either to your new company’s fund, a preservation fund, a retirement annuity fund or select a cash pay-out. “The red flag here,” says Manyike, “is not to use this cash but to reinvest it, otherwise your fund starts from scratch and all the benefits of the compound interest you have accumulated are negated.”
2. PROVIDENT FUNDS
A provident fund is almost the same as a pension fund. However, where they do differ is in the tax requirements. While you and your employer make monthly contributions to the fund, you will only be taxed when you access your funds.
If you leave a company before you retire, you may move your retirement savings out of the company fund to your new company’s fund, to a preservation fund or to a retirement annuity fund. Or you may use a combination of cash and transfer to an approved fund.
3. RETIREMENT ANNUITIES (RA)
RAs are independent of your employer and you are in complete control. You make monthly contributions of your choice and you get to choose which funds you which to invest your money in. If you have no experience in doing this, the RA fund manager will do so on your behalf.
If you change jobs, it makes no difference to your RA, as your RA will continue as per usual, accumulating compound interest and hopefully growing at a healthy rate.
Manyike concludes, “Should you be tempted to cash in your retirement savings to pay off debt, or to fund your current lifestyle - it simply is never a good idea, ever!
“You may think that your retirement pot can solve all your debt problems, but if you do fall prey to cashing in your fund, it becomes very difficult to ever get back to where you were on the savings ladder. The long-term repercussions can be abysmal, as you will have to start all over again, and you are not likely to ever catch up and recuperate the ‘lost’ money spent on debt.”
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