HOW TO PLAN FOR RETIREMENT

Retirement is something to look forward to. Put plans in place now so that when you retire you can live comfortably.

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Financial advisers warn that in the next 20 years many people will find they can’t retire on what they’ve put aside. If you’re wondering if you’re saving enough, you probably aren’t. And if you haven’t started yet, don’t leave it another day. Either way, take stock now. Here are some smart steps:

MAKE AN APPOINTMENT
Meet with an independent certified financial planner (CFP) in a practice approved by the Financial Planning Institute (+2786 1000 374, www.letsplan.co.za). Discuss what you will need to live on when you retire. Draw up a budget of what you currently spend a month (accommodation, electricity, water, transport and food), plus extras that come with age, like increased medical costs and perhaps a retirement home. To retire, you will need an income of 70 to 80% of your current salary, to provide for you until age 100 (we’re living longer!). You also need to factor in inflation and tax, says Cape Town CFP and wealth manager Cameron McCallum. You can use retirement calculators online as a guide, but a planner can enhance your investment returns to boost savings and manage tax. ‘It’s important to add in all the fees you will be paying for the investment,’ adds Durban CFP and wealth coach Susan Mercer.

INVEST
Invest as much as you can, but at least 10 to 15% of your earnings. Start from your first permanent job – the earlier the better, so as to benefit from compound interest and growth. For example, to save R1 million by age 65, if you’re now 25, the amount you need to invest is R178 a month. But if you’re 35, it’s R480; if you’re 45, it’s R1 381; if you’re 55, it’s R4 963; and if you’re already 60, it’s R12 958! If you start later, cut spending wherever you can, or you will need to work longer.

RETIREMENT FUND
Choose a suitable fund with guidance from your financial planner. If your employer has a pension or provident fund, you will usually be expected to join. You can also invest in a retirement annuity (RA) of your own to increase your savings and maximize your tax breaks. If you are self-employed, an RA is the way to go, offering significant tax benefits, says McCallum.

WHEN YOU RETIRE FROM A PENSION SCHEME
You need to convert at least two-thirds of your payout into an annuity that will pay you a regular income for the rest of your life. Different rules apply to different funds:
Pension scheme: You can take the remaining third as a cash lump sum.
Provident fund: You can choose a cash lump sum of anything up to 100% to be reinvested (perhaps in unit trusts), and convert the remaining amount to an annuity if you choose.
Retirement Annuity (RA): As with a pension fund, you must use at least two-thirds to buy an annuity; but as opposed to pension or provident funds, you can’t cash in an RA before you retire. ‘It’s vital to consider the tax implications of this decision,’ says McCallum, ‘as the amount taken in cash is subject to tax, while the amount transferred to an annuity is transferred tax-free, then taxed as income is drawn.’

ANNUITIES
When buying an annuity, you have two choices. A guaranteed life annuity will pay you a set income for the rest of your life, but your heirs won’t inherit. However, you can choose a set period during which the insurer will pay them an income, although the longer the period guaranteed, the less you will receive each month. A living annuity is more flexible, letting you choose your income each year (within limits) and change the underlying investments – and any capital left when you pass on goes to your heirs. A composite annuity offers a mixture of the two. ‘Be guided by your planner, as everyone has different needs and circumstances,’ says Mercer.

CHANGING JOBS AND GETTING A PAYOUT
If you change jobs and are paid out your pension fund or provident fund, resist any temptation to spend it – put it in a preservation fund to preserve it, or a new pension fund.

REVIEW EACH YEAR
Whatever fund you choose, review your investment portfolio and financial plan each year with your financial planner to be sure everything is on track, and in line with your savings and changing lifestyle needs.

CHOOSE WISELY
Finally, choose an established, reputable organisation and avoid get-rich-quick schemes. Take the time to do a bit of research before making a decision. If a scheme sounds too good to be true, it most probably is – and after retirement, you can never make up losses.

Text Glynis Horning