- WHAT IS RETIREMENT AND WHY WAS IT INTRODUCED?
Retirement is a lifestyle or financial change and involves leaving employment and or ceasing work at a specified age. The concept was first introduced by the Romans and paid as a pension to reward those who had served in the military. In the 19th century, the German chancellor, Otto Von Bismarck, introduced a law that anyone over 65 or was disabled from working would be able to claim a pension from the state. The United Stated also introduced a pension for firefighters, police and teachers in the mid-1800s. In 1875 the American Express Company started offering private pensions.
A Canadian physician, William Osler, said in 1905 that a man’s best work was done before he was forty years old and that by age sixty, he should retire as workers between forty and sixty were tolerable because they were “merely uncreative”. But after age sixty the average worker was useless and should be put out to pasture! He clearly didn’t even factor in the working woman.
Retirement became widely implemented in the USA after the Industrial Revolution where many aging workers were not able to work as efficiently as their younger counterparts and enforced retirement would give younger workers the opportunity to have employment.
How to encourage the older population to give up working? A payment incentive was introduced by the US government in 1935.
South Africans can apply for a government Old Person’s Grant of R1 500 per month at 60 years’ the ‘means test’ is passed ie. single persons with assets under R752 400 (including value of house) or R1 504 800 (including value of house) if married.
- HOW WILL LONGEVITY AFFECT MY RETIREMENT PLANNING?
If you lived in Classical Rome, you would probably have died before you were 30 years old. So retirement was not relevant. However, in the 1900’s 30 years old was considered a good age. The world average increased to 48 years in 1950, and today it is 71.5 years. The general trend is for humans to live longer due to improved lifestyles, health services and medication, so if you plan to stop working at age 60 or 65, you still need to provide for your lifestyle for another 25 years. It is essential to start investing for retirement as soon as you start to earn an income.
- WHAT IS THE DIFFERENCE BETWEEN A DEFINED BENEFIT FUND AND A DEFINED CONTRIBUTION FUND?
Companies used to pay workers a portion of their last salary on retirement until death and then usually a reduced payment to their spouse until death (defined benefit). This had the potential for a large liability for companies and therefore the trend has become the use of a defined contribution fund. A staff member’s contribution (and perhaps also the company portion) is invested and the ‘pot’ hopefully grows sufficiently so that on retirement the staff member can live off the proceeds until death of both him/her and the spouse. No liability for the company.
- WHY SHOULD I RETIRE?
A retirement date is usually written into a contract of employment. However, some companies allow staff members to continue working after retirement on a consulting basis with reduced company benefits such as risk benefits/medical aid etc.
Retirement might only be a financial transaction and not necessarily be the end of a working career, and a retiree’s career may take off in a completely different direction with unforeseen opportunities arising due to the change.
It is important to prepare psychologically for retirement well before the time, as it is a major change in lifestyle and perhaps financial circumstances. Statistics indicate that unprepared retirees can suffer from depression if they do not have other interests, or don’t feel productive or useful to society. This can impact the entire family.
- HOW WILL RETIREMENT AFFECT MY SPOUSE?
Managing the different aspects and expectations of retirement are important. It is recommended that you include your spouse in the retirement planning, both from a financial perspective and from a psychological perspective. Start working together with a financial planner in order to manage finances post retirement as this might entail budgeting carefully in order to maintain a certain lifestyle.
- COULD RETRENCHMENT AFFECT MY RETIREMENT?
Retrenchment can dramatically affect retirement planning due to an interruption of contributions towards retirement investments. Pension/provident fund members have the option of transferring funds into a preservation fund, or withdrawing them. The latter is an expensive choice due to the tax payable on withdrawal, the loss of compound growth on retirement capital and ceasing of monthly contributions.
- COULD A DIVORCE PREJUDICE MY RETIREMENT YEARS?
Yes, this can have a dramatic effect on your financial planning, as generally the value of one’s assets are split (according to the law under which you are married and the ante-nuptial contract signed) and this includes your retirement investments. There also may be awarding of monthly maintenance payments and doubling up of expenses and overheads of running two houses.
- WHAT ARE THE DIFFERENCES BETWEEN RETIREMENT INVESTMENTS AND VOLUNTARY INVESTMENTS?
Retirement investments such as pension, provident funds and retirement annuities have certain tax-benefits on both the contribution (limited to 27.5% of taxable income) and are not taxed within the portfolio in which they are invested. There are also no Capital Gains Taxes levied on the investment growth. This can make a difference of around 1% per annum to the additional growth potential of the investment. Retirement annuities are also exempt from creditors in an insolvency claim. Voluntary investments are made with after-tax funds and do not have the benefit of tax-free growth within the funds.
- WHAT IS A LIVING ANNUITY?
At any time after age 55 a retirement annuity or a pension/provident fund preservation fund may be invested via a Living Annuity in order to generate a regular income for the retiree. The income paid must conform to legislative limits (between 2.5% and 17.5% of the capital determined annually on anniversary of the investment). The income is fully taxable, but the growth in the underlying investment is not taxed. The capital value fluctuates dependent on the performance in the fund selected. On death the remaining capital is willed to beneficiaries and can either be paid out as a lump sum or income, and it does not form part of the estate.
The income in a Living Annuity is not guaranteed due to the fluctuation of the capital. If an income of higher than the fund performance is drawn, the capital is drawn down and this can have a long term effect on the retiree’s income.
- WHAT IS THE BEST AGE TO START SAVING FOR RETIREMENT?
It’s not only the amount of money saved that counts, but also when we start saving. The earlier you start, the more affordable the amount of money you need to put away each month will be.
Fifty percent of South Africans only start saving at age 28, as opposed to when we start earning a living. And how many only start in their thirties, or forties?
Here’s the thing. It is not as simple as “catching up’ savings over the years that you did not make contributions. That would be difficult enough! The reality is that you have lost out on the growth on your investment and the compound returns and that can only be compensated by increasing your contribution rate.
Let us look at an example. Themba, starts saving for retirement at age twenty five. He saves R5 000 a month. Over the period of saving, he achieves an average 6% return per year. By age sixty, he will have more than R 7 000 000,00. Fabulous!
Now look at Brenda who only starts saving at thirty-five. When she is sixty years old, she will have less than half the lump sum at R 3 460 000,00. By only starting saving at thirty-five years old, Brenda should have doubled her contribution rate to R10 000,00 per month. Over the twenty five years, Brenda would have then achieved R 6 900 000,00.
Start saving at age forty-five and you would have to increase that figure to R 20 000,00 or more per month! Unaffordable for most of us.
Don’t put your head in the sand. Be a money hero, a ‘Themba’ and start saving early.
- HOW MUCH MUST I SAVE FOR MY RETIREMENT?
We work on a replacement factor of 75%. This means that you will need to have 75% of your last working salary to retire comfortably. We would also presume that you have no debt at this stage – no mortgage bond or car finance or credit card debt.
We often think that you need more than 75%, or an extra lump sum set aside to cover medical expenses, as recent data suggests that medical expenses have increased enormously post retirement.
- I NEVER HAVE ANY MONEY LEFT AT THE END OF THE MONTH, HOW CAN I START SAVING FOR MY RETIREMENT?
Delaying saving for retirement is not uncommon. Other life costs seem more important¬ – there’s a wedding to pay for, a deposit for a new house to put down, a baby, school fees and that holiday you absolutely must take. Family pressure and peer pressure are huge. However, you have to make a decision to put your future first and be resolute. This is not easy and to do so you’re going to need to ruthlessly cut back on your expenses. No expense is sacred and a good approach is to call a family meeting and decide how the cuts are to be made. Aim to save at least a quarter of your net income. An automatic debit order into a retirement fund, is a good start and will make a big difference.
- MEMBERSHIP OF MY COMPANY RETIREMENT FUND IS NOT COMPULSORY – SHOULD I JOIN?
Membership of a fund is compulsory when joining an Employer – SARS grants tax approval provided all eligible employees join the fund, unfortunately a member does not have a choice.
But the economies of scale come into play in terms of fees and Investments. There is an upfront fee but no ongoing administration and commission fees on their cumulative total
The risk costs are cheaper and afford cover irrespective of a members current health situation subject to less stringent terms and conditions.
- SHOULD I CONTRIBUTE TO MY OWN PERSONAL RETIREMENT ANNUITY? I AM ALREADY A MEMBER OF MY COMPANY PENSION FUND.
Even for those of us who have been forced to save (thanks to a compulsory pension fund or retirement annuity deductions at work), it might not be enough. The easiest way to try to solve this problem is to save more and the best way to save is through a disciplined monthly debit order to a retirement annuity.
Contributing to a retirement annuity can be a very effective way of boosting your retirement savings. These contributions will also be tax deductible (up to your maximum tax deductible limit) and in addition, Returns on investments within retirement annuity funds are not subject to income tax, capital gains tax or dividend withholding tax. Retirement annuity funds therefore offer a welcome tax break from the outset.
- WHAT IS THE MAXIMUM THAT I CAN CONTRIBUTE TO MY RETIREMENT FUNDS?
Thanks to a recent change to the Income Tax Act, you may deduct up to 27,5% of your taxable income (whichever is the higher) in respect of your total contributions to a pension, provident or retirement annuity fund, subject to an annual tax deductible limit of R350 000. There is nothing to stop you from contributing more than the deductible limit if you want to. If you do this, there are tax benefits when you retire. limit of R350 000.
- CAN I COMBINE MY RETIREMENT ANNUITY AND COMPANY PENSION FUND?
No there are different sets of rules for each fund, although National Treasury is looking at harmonisation of retirement funds. It is possible at the time of retirement and a good Financial Adviser will be able to advise you as to whether it is in your interests to do so.
- WHO LOOKS AFTER MY INTERESTS IN MY COMPANY PENSION FUND?
A board of trustees is appointed to every retirement fund. Members have the right to elect at least 50% of the members of the board of trustees.
The rules of the retirement fund must stipulate how the trustees are to be elected, their term of office and when they cease to be trustees.
The trustees must at all times act in good faith towards the fund. They must exercise their powers to the benefit of the fund and in such a manner as to always act in the best interest of the fund and its members
- WHAT WILL HAPPEN TO MY RETIREMENT SAVINGS IF THE STOCK MARKET CRASHES?
You cannot time the stock market. It is ‘time in the market, not timing the market’ which makes a difference.
Over the past 100 or so years, there have been a handful of ‘bear’ markets, characterized by a fall of 20% or larger. Some took longer to recover and some were short-lived. However, even after the Global Financial Crisis of 2009, those investors who just remained invested, were rewarded with their investments regaining their value after 18 months. Retirement savings are a long term investment. One must just be patient and stick to the plan.
- WHAT IS THE BEST AGE TO RETIRE? DOES IT MAKE ANY DIFFERENCE WHICH MONTH IN YEAR I CHOOSE TO RETIRE?
The best age to retire is when one can afford it and when one is mentally ready to venture into this stage of one’s life.
One can only access one’s retirement funds after age 55, unless the retirement is due to ill health.