Saving for retirement is one of the most important financial goals for individuals over their lifetime, regardless of their stage of career. Retirement planning can be daunting, but it is critical to start saving as early as possible to ensure a comfortable and secure retirement. In this article, we will provide an overview of what you need to know at different stages of your career to save for retirement.
Early Career
Starting your career is an exciting time, but it is also the best time to start cultivating the discipline needed to save for your retirement. The longer you wait, the harder it becomes to catch up. In South Africa, there are a few retirement savings options available to you at this stage, including the employer-sponsored pension or provident fund or a retirement annuity (RA).
An employer-sponsored pension or provident fund is an excellent option because your employer contributes to your retirement savings, and the contributions are tax-deductible. Contributions made to your retirement annuities are also tax-deductible, and you can contribute up to 27.5% of your taxable income.
It is important to start with a realistic retirement savings goal, and financial advisors can help you develop a personalised plan. You should also review your savings plan annually to ensure that you are on track to reach your goal.
It is important to understand that when you start saving towards a long-term goal, your savings must grow at a rate above that of inflation. The golden rule in the investment world is that when you want to increase your investment growth, you must increase the risk exposure of your investment. This is usually done by increasing the exposure to riskier asset classes such as equity. Retirement savings are however regulated and the exposure to the various asset classes has limits on how much can be invested in each. During this phase, while your retirement goal is still a long-term goal, it is recommended to invest in retirement funds that are specifically classified according to The Association for Savings and Investment South Africa (ASISA) standards as “multi-asset high equity” funds.
Mid-Career
At this stage of your career, you may have accumulated some retirement savings, but it is still essential to continue saving for retirement. It is recommended to increase your retirement savings as your income increases to ensure that you are on track to reach your retirement savings goal.
If you change jobs, you can transfer your pension fund to your new employer’s pension fund or your existing RA. Alternatively, you can move your pension fund or RA to a preservation fund. A preservation fund is an excellent option for individuals who want to preserve their retirement savings and avoid tax penalties for early withdrawal.
Late-Career
As you approach retirement age, it is essential to review your retirement savings plan and ensure that you have saved enough to retire comfortably. If you have not saved enough, you may need to delay your retirement or increase your savings to make up for the shortfall.
If you have a retirement shortfall you can also consider adjusting your lifestyle by downsizing your home or reducing your living expenses to free up additional funds for retirement savings. It is also essential to review your investments regularly and make adjustments to ensure that your retirement savings are on track.
Since you are closer to retirement and will withdraw the investments relatively soon, you need to adjust these retirement products to lower risk investment exposure. Talk to a financial expert to help you identify which underlying funds are more suitable for your retirement products at this stage in your career.
Retirement
Once you retire, you will need to decide how to access your retirement savings. You can choose to either use your retirement savings to purchase a living or a life annuity. A life annuity provides a guaranteed income for the rest of your life while a living annuity gives a retiree control to manage their own retirement funds by deciding how much you want to withdraw annually and how the funds are invested.
A lump sum withdrawal can also be taken from your retirement savings before a life or living annuity is purchased. When deciding if and how much a retiree want to withdraw funds at this point, it is important to consider the tax consequences. Lump sum payments are taxed according to a sliding scale, while annuity income is taxed at your marginal tax rate.
Conclusion
Saving for retirement is critical, and it is essential to start as early as possible. It is further also important to review your retirement savings plan regularly and make adjustments as needed to ensure that you are on track to reach your retirement savings goal.
If you need help with retirement planning, consider consulting with a financial advisor who can help you develop a personalised plan based on your individual financial situation and goals. By taking the time to plan and save for retirement, you can enjoy a comfortable and secure retirement.
