6 ways to boost your retirement savings
Planning for retirement is a complicated business. You need to save enough while earning, and make sure you get good returns on your investments so that your money will last for your entire retirement. There’s no magic formula, though, and no one-size-fits-all solution, but here six factors that drive better retirement outcomes.
'The “secret sauce” of retirement investing is compound interest'
‘We think of them as levers,’ says Old Mutual Corporate Consultants Head of Advice Andrew Davison. ‘They’re intertwined, and we want our clients to be able to play with all six. For instance, if you pull one lever, what will the impact be on the other five?’
‘There are combinations that make sense and many that don’t,’ adds Old Mutual Corporate Consultants General Manager Malusi Ndlovu. ‘Ultimately, as you examine the six levers, you’ll come to understand what makes sense for you.’
Lever 1: Contributions
‘Contributions don’t do the heavy lifting,’ says Davison, ‘but they are your ticket to the game. If you don’t contribute enough to your retirement pot, there won’t be enough to grow.’ This raises the question of how much you should contribute. There is no one answer and it will ultimately depend on your time horizon and investment returns.
‘We encourage clients to save at least 15% of their salary and aim for a return of 5% above inflation over 35 to 40 years,’ says Ndlovu.
It doesn’t mean that you have to chase high-return, riskier investments. If you’re a conservative investor who is happy with relatively low returns, that’s fine too; it simply means that you will have to contribute more. If you want to keep your contributions low, that’s also okay; it just means you’ll have to retire later.
Lever 2: Investment strategy
‘The “secret sauce” of retirement investing is compound interest, which only works over the long term,’ says Davison.
He uses his own experience to illustrate the difference it can make and the extent to which it does the ‘heavy lifting’: ‘I left my previous employer and their pension fund 16 years ago, and preserved my retirement savings in a preservation fund. Since then I haven’t touched it but I also haven’t added anything to it. Today it’s worth close to six times the amount I initially transferred purely thanks to the magic of compound interest.’
Lever 3: Preservation
Old Mutual Corporate Consultants recommend having about nine or 10 times your annual salary saved up when you retire. The trouble is, everyone is likely to change jobs a few times in their career – and every time you’ll be given the option (and be tempted) to withdraw your retirement savings rather than leaving it in a preservation fund.
‘Each time you cash in your savings, you’ll have to start from scratch,’ Davison cautions. ‘The money I preserved all those years ago is now equal to almost a year’s salary. If I hadn’t, I’d be down one of those nine or 10 annual salaries I’d need and would have to contribute even more now.’
Lever 4: What you do at retirement
On the day you retire you will be faced with an array of very important choices, yet most people are utterly unprepared for them. ‘They really are momentous decisions that will determine how you live from then on, yet you’re thrown in at the deep end and a bad decision can undo a lifetime of good savings behaviour,’ says Ndlovu.
Fortunately, a well-managed retirement fund gives you free access to a retirement benefits counsellor who can talk you through your options and the implications of each.
Lever 5: Retirement age
For some of us, ‘normal’ retirement age is 65. For others it may be 60, or 55. And that’s before you consider gig workers, whose idea of retirement age is entirely flexible. ‘The word “normal” therefore should probably be removed from the lexicon,’ says Ndlovu. ‘George Foreman put it well: “The question isn’t at what age I want to retire, it’s at what income.”
‘Although not everyone has full control over when they retire, your focus shouldn’t be on a retirement age, but rather on when you will be financially ready to retire.’
Lever 6: Pensionable salary vs cost to company
The difference between your pensionable salary and cost to company (CTC), Davison points out, might seem like a trivial matter but could have a significant impact on your retirement savings.
Your CTC is the most accurate measure of the income sustaining your lifestyle prior to retirement. It thus makes sense that this is the salary that you need to replace with a pension in retirement. Yet many funds use a definition of pensionable salary that is much lower than CTC.
As an example, if your CTC is R50 000 a month but your pensionable salary is 80% of your CTC, all your retirement calculations will be based on R40 000. If your pension fund targets a post-retirement income of 70% of your at-retirement salary, which is a perfectly reasonable target relative to pre-retirement income, 70% of your CTC salary would be R35 000.
But 70% of your pensionable salary – 70% of 80% of your CTC – will be just R28 000. This is equal to 56% of your CTC. You see the problem? If you base your calculations on your pensionable salary instead of your CTC, your departure point will be wrong and you won’t get to where you want to be.
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