In Episode 5 of Change in your Pocket, we look at the various options available when it comes to saving money for your retirement.
– Video supplied by BrightRock
Welcome to The Change Exchange, where we are helping you find ways to make the most of out of your paycheque.
Here’s a scary thought: if you are 25 years old today, you have a good statistical chance of living to the age of 90. If you plan on retiring at 60, that means you have only 420 paycheques before retirement, at which point you will need sufficient money to fund 360 months of expenses.
There are only three ways you are going to achieve this:
- Start saving TODAY;
- Invest in growth assets that will grow ahead of inflation (like property and shares); and
- Re-invent your career so you can earn an income well into your 60s.
Let’s start with the savings part. The good news is that you have the opportunity to save money that you would normally be handing over to the taxman, by investing in a retirement fund. Depending on your tax rate, you are able save between 18% and 40% more each month.
If your marginal tax rate is 30%, for every R1 000 you invest, you pay R300 less tax ‒ that’s an extra R300 to put into your retirement savings each month, or R126 000 over your working life.
Now take the growth on that saving. If you invested this tax saving of R300 into a growth fund earning 12% a year, over 35 years you would have accumulated nearly R2 million thanks to the taxman.
Not only do you receive a tax break when you invest, but you also don’t pay capital gains tax, dividend tax or interest income tax. Over a period of 35 years these tax savings can effectively double your lump sum in retirement compared to savings outside of a retirement fund structure, such as a unit trust.
A retirement fund is also safe from creditors, so if you hit financial difficulty no one can attach your retirement funds – not even SARS! It is one of the few financial protections you have.
Unfortunately government does limit the amount you can save tax-free. These figures are all about to be revised through new legislation, but generally speaking, at the moment you are able to save 15% of your income into a retirement fund tax-free. The plan is to increase this to 27%.
When it comes to selecting the right retirement product, the most cost-effective way is to invest through your company’s retirement fund. If, however, you are self-employed, your company does not have a retirement fund, or you cannot maximise your retirement savings through the company fund, then you should invest in a retirement annuity (RA).
It’s worth explaining the difference between an employer fund and a retirement annuity.
A retirement annuity is a retirement fund taken out by an individual and is not affected when you change jobs. You cannot cash in a retirement annuity until your selected retirement age.
On the other hand, a pension fund and a provident fund are provided by an employer to an employee. If you leave your employer, you can either withdraw your retirement funds as cash, or preserve the funds.
If you decide to cash in your funds, taxation will apply and it would affect your tax-free withdrawal amounts on retirement. If you choose to preserve the funds, you could arrange to have the funds transferred to your new employer’s fund, or into a preservation fund or retirement annuity.
Not only is it a good idea to preserve your retirement funds so that you have sufficient money in retirement, but you also avoid taxation.