Monthly Archives: May 2016

Save for retirement if you have just 35

Employees in their twenties could be tempted to postpone saving for retirement for a decade or two, arguing that they would make up the shortfall later on when they earn a bigger salary.

Even where young workers do save from day one, the fact that many people don’t preserve their retirement benefits when they change jobs, effectively mean they also defer saving for retirement. More than two-thirds of pensioners who participated in Sanlam’s Benchmark Survey 2016 indicated that they did not preserve their savings when changing jobs and it is no surprise then that only 35% of the same group believed they have saved enough for retirement.

A research paper by David Blake, Douglas Wright and Yumeng Zhang called Age-Dependent Investing: Optimal Funding and Investment Strategies in Defined Contribution Pension Plans when Members are Rational Life Cycle Financial Planners investigates a retirement funding model that spreads the income earned as smoothly as possible from the time an individual starts working until the day she dies.

Discussing the implications of such an approach at the launch of the survey, Willem le Roux, actuary and head of investment consulting at Simeka Consultants and Actuaries, said quite controversially, the model demonstrates that the member would save nothing before the age of 35, but from age 35 she would save every increase received above inflation towards her retirement.

“So you are basically capping your standard of living from age 35.”

However controversial such an approach would be, at the very least anyone aged 35 and younger has no reason to bury her head in the sand in the belief that retirement is going to be tough, Le Roux said.

“In fact, the future can still be very rosy.”

But postponing will come at a cost. Based on the average member, contribution rates could get as high as 35% by the age of 60, according to the model.

Le Roux said as an actuary he wouldn’t recommend that everyone under the age of 35 should contribute nothing towards their retirement.

Saving is a culture and it would be very difficult to start saving large portions of your income towards retirement when you’ve saved nothing for a decade.

It would also be extremely challenging to cap your standard of living from age 35.

There are also other factors to consider.

Budget and your lifestyle must be balance

Let’s face it: we all want the lifestyle of our wealthy friends, neighbours or celebrities even when our own lives might be on the right track.  We never seem to have enough, unless of course we decide to change the way we think and how we measure our own success. That starts by living within our means – something that is not an easy decision for most of us to do.

I recently met investors who should have been very well off during retirement as they have managed to save more than R 20 million. Unfortunately, their lifestyle costs are so high that their money will only last for ten to 12 years after retirement.  They need to make drastic changes to their spending habits or retirement is going to be a difficult time for them.

How did this happen?

My sense of these investors is that they earned a great income and never once budgeted to save. Their saving was an accident and something that happened on an ad hoc basis because they never had a spending plan. Your budget is in constant competition with your lifestyle unless you keep it under tight control. Life is about making compromises, but you need to make sure that you take the negativity out of this process and look for positive compromises. What do you really want? Do you want to curb your grocery spending so that you can have one great meal eating out at that fantastic new restaurant? Would you like to send your child to private school or live in the bigger house? Drive the new shiny car or go on a holiday?

You need to decide what makes you happy and spend your money on this. That means you need a budget – something most people don’t have. Once you have worked out what you need every month to cover your lifestyle costs, transfer the difference in your transaction account to another account, where you won’t be tempted to spend it on frivolous items. Hopefully there is an excess in your budget and if there isn’t, get a third party to help you. You are the only one with an emotional attachment to your money and a pair of impartial eyes can help to make you think clearly about your money and to make smarter decisions.

And then you need patience. Once you have decided that you want to take that trip to Italy, you have two choices. You can go immediately and use your credit card or you can save and wait until you have the money to pay for the trip. If you have the cash available; a trip to Italy will cost you at least R 25 000 (as an example). If you decide to pay upfront with a credit card it will cost you between R 44 289 and R 64 843, depending on whether you pay it off in three or five years at an interest rate of 21% per annum. Most of us are able to stomach R 25 000 for such a trip, but R 64 843 is a bit rich. Patience has a real monetary value.

Patience is tested especially when you start to save for retirement. This is usually because we do not have an idea of what retirement will look like. We almost try to avoid it, because it reminds us that we are getting older. If you know where you would like to stay after retirement and what you would like to do with your time, the decision to save for it becomes far easier.

Lifestyle is important; this is how we live every day, but it must fit into your income. So figure out what you can do without to make the things that are really important to you, obtainable.

Contribute to an RA in retirement

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know what the benefits would be of investing a lump sum into a retirement annuity at retirement.

Q: I am of retirement age, have worked for myself my entire life and never contributed to any retirement scheme. I have a lump sum to invest, which is my accumulated savings on which I now plan to retire.

I have been advised to invest this money into a retirement annuity, but I am unsure if this is the best approach. Why should anyone invest money that was not previously tied to a pension fund into a vehicle that will tie up the capital forever? I could invest it elsewhere to generate the same returns and have access to the capital at any time.

Are there tax or fee implications that would make putting the money into an RA a better deal, or is my adviser the one trying to get the good deal?

Contributing a lump sum of voluntary money to a retirement annuity has various advantages and disadvantages. Some apply to the retirement annuity itself, and some apply to the vehicle you choose for producing your income in retirement. For the purposes of your question, I have assumed this to be a living annuity.

First of all, the lump sum you contribute to a retirement annuity will be allowed as a deduction against your income. This is up to a limit of 27.5% of your remuneration or taxable income, or R350 000 (whichever is lower) in the current year. So initially, you will get a tax deduction.

The amount that exceeds this limit would however be carried forward and can be deducted against your income in subsequent years, or will be deducted against your annuity income that you receive from your living annuity at a later stage. So although you only get an immediate tax deduction up to the limit, you don’t lose the full 27.5% allowance.

In addition, within the retirement annuity, and later in a living annuity, you will not pay tax on interest, dividends or capital gains.

However, within a retirement annuity there are restrictions as to how you may invest. These place limits on the amount you may have in equity (no more than 75%), property (no more than 25%) and offshore assets (no more than 25%). As you are close to retirement, it is unlikely that you would want to take on the risk of exceeding these limits anyway, but it is something to take into consideration. When you retire and move the funds to a living annuity, these regulations will not apply.

In addition to this, as you have mentioned, your funds would be tied up to a certain extent. You can only take one third out at retirement and the remaining amount must provide you with an income thereafter. Assuming you invest the remainder into a living annuity, you will only be allowed to withdraw between 2.5% and 17.5% per annum of the value, and this amount can only be reviewed once a year.

It is best to explain how this all works by way of an example. Let us assume that your accumulated savings are R5 million and your current year’s taxable income is R500 000. Let us also assume that you intend to work for two more years and retire thereafter, and that your taxable income remains constant for the next two years.