Start a retirement account next week and two things will happen: -
You will be more financially prepared than 99% of your peers, and;
You’ll have an investment that offers huge tax/growth advantages in exchange for your promise to continuously invest in it for the long term.
A retirement account–whether it’s a Retirement-Annuity (RA) or Pension/ Provident Fund (PF), lets your money grow at an accelerated rate with hardly any extra work from your end. Now let’s get into the details.
The first and most significant benefit is the tax deductibility of retirement account contributions. As from 1 March 2016 all contributions to PF and RA funds are consolidated and are deductible up to 27.5% of the greater of remuneration or taxable income, capped to R350, 000 annually.
Not only can you invest with before-tax money, but you do not have to pay capital gains tax or income tax on your retirement investment. Your investment growth will be higher over the long-term as the growth remains in the policy and will usually offer you a better after-tax return than other types of saving.
Put another way, when investing over the long term, investment capital will start to experience additional growth from the investment returns. The longer the investment period, the more robust the earnings will be. As this compound growth takes place within the retirement account, all the growth will be tax-free. Depending on your choices at your elected retirement age, a tax event may occur but until then, why attract tax on money that’s still growing?
Time can work for you, or against you. Your time horizon can seem so long, that you fail to prioritise investing for your future. It’s so far off, and so full of unknowns, that it slides down that list of priorities. But in reality, time is the most valuable asset you have for implementing a successful plan.
It’s ironic that it’s considered strange for a young person to attend to their retirement planning. Retirement planning advice by far benefits young people more — time is money, and young people have time on their side.
A retirement plan requires a bit of initial legwork, followed by sufficient time to execute in a (mostly) passive fashion. A successful retirement plan doesn’t involve backloading savings to middle-age. Nor does it involve waiting until 60 to discover that big changes are needed, with minimal time remaining. And it certainly doesn’t involve prematurely tapping into your savings to cover the cost of your life while young.
So, it logically makes sense that younger people should pay attention. But I know better than to expect this — often, even older people fail to pay attention. But that’s even more reason to talk about this very subject.