What is retirement planning?
Retirement planning is preparing financially for life after work to ensure you maintain your desired lifestyle. A retirement plan is a long-term financial strategy that helps you reach your financial goals and achieve financial security over retirement. Planning a successful retirement is best done with a professional by your side since each retirement plan is unique and must be tailored to individual goals and financial situations.
A financial adviser offers guidance based on your unique risk profile. Financial advice for retirement planning includes setting income goals, estimating future inflation rates, identifying future income sources and expenses, and managing risks and assets.
Why is retirement planning important?
Retirement planning is important for many reasons, with 7 key factors described below.
Financial Security: A financial adviser helps you understand the best savings, investment returns, and withdrawal strategies to have enough savings to maintain your lifestyle and meet your needs in retirement.
Inflation: Financial advisers know the best strategies for protecting your money against rising living costs over time. This reserves your purchasing power for longer.
Retirement Goals: A good retirement plan should allow you space to work toward any plans or achievements that you have lined up for retirement.
Life Expectancy: The increased global life expectancy has made it even more important to address the financial needs of a longer retirement.
Tax Benefits: Strategic investment in retirement accounts with the help of your financial adviser offers tax advantages.
Regular Income: Well-planned savings and investments allow a steady income stream post-retirement.
Early Retirement: You have a higher chance of retiring early when you are financially prepared. Set a goal for your retirement age.
What are the considerations for retirement planning?
The many considerations you need to make for retirement planning can be described in 4 categories, which are outlined below.
1. Timeline and goals
The age that you plan to retire
Your lifestyle expectations for retirement
Income source/s once you retire
Future expenses you need to plan for
2. Financial aspects
How much is needed for a comfortable retirement
Your risk tolerance for investment decisions
Impact of future inflation, taxes, and compound interest
3. Savings strategy
Start saving early to benefit from compound interest
Contribute to employer's retirement plans and individual retirement accounts
Take the time to learn about basic investment principles and understand pension plans and retirement funds
4. Comprehensive planning
Keep track of your current income sources and expenses
Come up with a savings plan and budget that includes your retirement goals
Trust a financial adviser to manage your assets and risk for financial security in retirement
How do you calculate how much you need for retirement?
There are a few different ways to calculate how much you need for retirement. Consulting with a financial adviser is the best way to help you estimate how much savings you need for a comfortable retirement. Financial advisers have the professional knowledge to factor in your income, lifestyle, and potential expenses.
Here are 3 simple methods you can use to determine an estimate of how much money you need to save for your retirement.
Replacement Ratio: This method assumes a 75% replacement ratio of your current income. This is calculated by multiplying your monthly salary by 200 to estimate the total amount needed for retirement.
Age-Based Savings Targets: This method aims to save an amount equal to your current annual income by age 30, three times your income by age 40, and 10-12 times your income by retirement.
Old Mutual’s Retirement Calculator: This handy tool from Old Mutual helps determine your potential retirement income and additional savings you may need to meet your retirement goals.
Why Do I need a financial adviser for retirement?
It is helpful to have a financial adviser to analyze your individual needs and offer personalized advice for retirement planning. A good financial adviser avoids costly mistakes and keeps you on track with your savings, helping you make informed decisions about your retirement options. Fund management by a professional financial adviser has benefits for tax-efficient investments, estate planning, and optimising your asset portfolio for a more comfortable retirement.
At Finpas, we provide retirement and financial advice based on your financial goals, risk tolerance, and investment timeline. Our advisers also regularly review and rebalance client investments based on market conditions and changing client needs.
What are Examples of Retirement Funds in South Africa?
The 4 examples of the most common retirement funds in South Africa are outlined below.
Pension funds
Provident funds
Retirement annuity (RA) funds
Preservation funds
Pension funds are a type of retirement savings set up by some employers. Both employer and employee contribute to the pension fund monthly as long as the employee works for the company. Over time, these contributions grow, ultimately providing the employee with a retirement income. Similar to pension funds, provident funds are government-managed retirement investments offered by some employers or companies. Pension and provident funds receive regular contributions from both employee and employer and are usually compulsory within a company. Employees who resign before retirement have 4 options for their pension or provident funds.
They can transfer their current retirement savings into their new employer’s fund
They can transfer their savings into a pension/provident preservation fund
They can transfer their money to an RA fund
They can withdraw their current savings as a cash payout. However, this is taxable and is generally discouraged by financial advisers since the goal of these funds is to provide an income at retirement.
Retirement annuities (RAs) are personal retirement savings plans designed to be tax-efficient. Unlike pension and provident funds, retirement annuities are independently owned and not tied to employment. Investor contributions are tax-deductible within certain limits, reducing taxable income and offering faster growth. A retirement annuity provides investors the flexibility to start, stop, or adjust contributions as needed. When leaving an employer, investors can transfer existing employer-sponsored retirement savings (pension and provident funds) into an RA. At retirement, you can withdraw up to one-third of the RA's value, while the remaining two-thirds must be invested in an annuity for ongoing income.
Preservation funds are a retirement planning tool designed to safeguard pension or provident fund savings when an individual changes jobs or their fund is dissolved. Preservation funds comply with specific regulations set by the South African Revenue Service (SARS), ensuring that the transferred benefits are protected and can provide a stable financial future for the investor. These retirement funds ensure that retirement benefits are maintained and continue to grow until retirement. Investors can make one withdrawal from a preservation fund before retirement, however this is taxable.
Is provident fund and pension fund the same?
Yes, provident funds and pension funds are now considered the same in South Africa. However, there were differences between them before the changes in tax laws in March 2021. Prior to this, a provident fund allowed members to withdraw the entire sum as cash upon retirement (subject to taxation) without the requirement to purchase an annuity. Since the change in tax laws, retiring individuals have two options.
1. Preserve their savings in full in a pension or preservation fund.
2. Withdraw up to one-third of their fund in cash. The remaining balance must be invested in an annuity that provides them with an income.
Is a retirement annuity a provident fund?
No, a retirement annuity differs from a provident or pension fund. While both are retirement products that offer tax incentives, there are 6 key differences between these funds which are outlined below.
Ownership and Purchase: Provident funds are typically offered through employers as a company benefit, while retirement annuities are purchased individually from an investment platform or insurance companies.
Contributions: RA contributions are flexible, they can be adjusted by the individual and continue independent of employment status. Pension/provident funds are typically mandatory when sponsored through an employer, and contributions usually cease upon leaving the employer.
Access to Funds: Investors cannot access funds from an RA before retirement age, usually at least 55. Pension/Provident Funds allow for early withdrawals under certain circumstances, subject to tax implications.
Investment Options: There is a wider range of investment options for RAs compared to provident and pension funds, which generally offer limited investment choices selected by the employer/fund manager.
Ownership and Control: Investors own their RA investments independently, while pension/provident funds are managed by trustees appointed by the employer or fund manager.
Fees: RAs typically have higher fees compared to provident funds, which are often structured to have lower administrative fees.
How does a retirement annuity work in South Africa?
A retirement annuity (RA) works to help investors save for retirement in a tax-efficient fund in South Africa. A retirement annuity is not tied to employment, allowing flexibility for individuals to contribute to their retirement savings regardless of their job status. Contributions to an RA are tax-deductible, limited to 27.5% of your annual taxable income or R350,000 per annum, whichever is lower. These contributions help reduce taxable income for faster savings growth.
Funds in an RA can only be accessed from age 55, though retirement at that age is not mandatory. Upon retirement, you can withdraw up to one-third of your savings as a tax-free cash lump sum if it is less than R500,000. The remaining two-thirds must be used to purchase a living annuity, which provides a monthly pension during retirement.
Which retirement fund is best?
Deciding which retirement fund is best for you depends on your employment status, financial goals, and need for flexibility. Here are 5 factors to take into account when considering which retirement fund is best for you.
Employer Sponsorship: Pension and provident funds are tied to employment and typically require participation if offered by your employer. RAs are independent and available to anyone.
Contributions: Pension and provident funds involve contributions from both employer and employee, while RA contributions are solely the responsibility of the individual.
Tax Efficiency: All retirement funds in South Africa offer tax benefits, including tax-deductible contributions and tax-free growth on investment returns.
Investment Choices: RAs generally offer more investment options compared to employer-managed pension and provident funds, where choices are determined by fund trustees.
Access to Funds: Pension and provident funds allow for early withdrawal under certain conditions, whereas RAs generally restrict access until age 55.
If your employer offers a pension or provident fund, participation is typically compulsory and a good starting point. For additional savings or if you are self-employed, a retirement annuity provides flexibility and tax benefits. Preservation funds are essential for maintaining retirement savings when changing jobs.
How Does Retirement Work in South Africa?
How retirement works in South Africa is set to change significantly starting from 1 September 2024, when workers who contribute to retirement funds are allowed to withdraw a portion of their accumulated savings for the first time. This shift follows the official announcement in the Budget Speech 2024. The new regulations aim to balance the preservation of retirement funds until the member reaches retirement age while providing limited access to savings during their working years.
Retirement age for non-government employees in South Africa is typically between 60 and 65 years. However, some individuals continue working beyond this age depending on their employment contract or the rules of their pension fund. For instance, the Government Employees Pension Fund (GEPF) sets its normal retirement age at 60 but provides options for early retirement or retirement due to medical reasons. Upon retirement, retirees receive their full fund credit plus any applicable Retirement Annuity (RRA). Retirees then make the important decision between receiving their retirement benefits as a lump sum payment or converting them into a monthly pension, depending on the provisions of their retirement fund. Members of provident funds or provident preservation funds typically receive their retirement interest as a lump sum, unless the fund's rules stipulate otherwise. Retirement benefits vary depending on the type of fund and age of retirement.
What Is The Two-Pot Retirement System?
The two-pot retirement system is a change in South African legislature that splits monthly contributions to retirement funds into two parts: a 'savings' portion and a 'retirement' portion. Starting in September 2024, 10% of an individual’s retirement funds will be placed into a ‘savings pot’, up to a maximum of R30,000. Thereafter, one-third of the individual’s contributions to retirement funds will be added to this ‘savings pot’, with the two-thirds balance going to the ‘retirement pot’.
Any member of any retirement fund will have access to their individual ‘savings pot’ for each fund that they contribute to. The ‘savings pot’ provides flexibility for emergencies, while the ‘retirement pot’ is preserved until retirement to ensure financial stability. However, withdrawals from the ‘savings pot’ are taxed at a higher rate than at retirement and administrative fees apply, so the actual amount received will be less than the requested amount. In some instances, members may even find themselves with no funds if they have debt with SARS. Additionally, it is not advisable to withdraw from your retirement funds unless absolutely necessary.
The South African government has introduced this two-pot system with the hopes of balancing long-term security and immediate needs by allowing fund members to access a portion of their retirement savings during financial distress. Before this, retirement annuities had generally been inaccessible before retirement, and access to pension and provident funds was only through resignation.
What is the Best Way to Save for Retirement in South Africa?
The best way to save for retirement in South Africa is to make strategic decisions tailored to your financial goals and circumstances. The most effective tool is to consult with a wealth manager to provide insight and guidance on your options and ensure your retirement savings strategy aligns with your broader financial plan. Choosing the right approach for your retirement savings depends on factors unique to each individual. This includes how soon you plan to retire, your current contributions and their growth potential, your monthly budget flexibility, liquidity needs, and how different retirement investment options align with your goals.
It is important to invest in a retirement savings account regularly, such as a Retirement Annuity (RA) or a company-sponsored retirement fund. These contributions are tax-deductible and accumulate returns tax-free over time. Supplementing a pension or provident fund with additional investments is beneficial based on your financial situation.
Ultimately, the way you save for retirement should be a well-informed decision that optimizes tax benefits and investment growth potential and aligns with your long-term financial goals. Always consult a professional before making major financial decisions.
How do I Plan a Successful Retirement?
Review your retirement plans consistently to plan a successful retirement. Additionally, remember the following 10 guidelines.
Diversify Investments: Balance your portfolio with a mix of assets and cash to spread risk and maximize returns over time.
Understand Retirement Needs: Calculate the amount you will need to maintain your desired lifestyle during retirement.
Start Early: Start to plan and save for retirement as soon as possible to benefit from compound interest and allow your investments to grow over time.
Make Informed Decisions: Evaluate fund options considering tax benefits and investment growth potential.
Automatic Contributions: Set up automatic contributions to your retirement accounts to ensure consistent savings and avoid spending the money elsewhere.
Adjust Your Plan: Regularly review and adjust your retirement plan based on financial circumstances, market conditions, and personal goals.
Consider Healthcare Costs: Budget for potential healthcare expenses, which often impact financial requirements during retirement.
Consult with a Professional: Get advice from a qualified financial advisor to help you navigate financial decisions, optimize your savings strategy, and ensure you stay on track to meet your retirement goals.
Plan Life Stages: Tailor your retirement plan according to different life stages. Adjust your investment mix and savings rate to align with your needs and risk tolerance as your money grows, and as you approach retirement age.
Maintain Discipline: Don’t withdraw from your retirement savings early. Stick to your savings plan to achieve long-term financial security and success in retirement.
What are the challenges of retirement?
There are several challenges of retirement that require careful planning, financial literacy, and professional advice. 13 of these challenges are outlined below.
Financial Strain: Many retirees face financial challenges due to insufficient savings or unexpected expenses during retirement.
Health Conditions: Health issues can arise or worsen with age. This leads to increased healthcare costs and impacts quality of life.
Social Roles: Retirees often struggle with changes in social roles and relationships after leaving the workforce.
Lifestyle Adjustments: Adjusting to a new daily routine and finding meaningful activities is sometimes challenging for retirees.
Loneliness and Isolation: Some retirees struggle with feelings of loneliness and isolation following a lack of social interaction and companionship in retirement, which affects mental well-being.
Loss of Identity: It is not uncommon to experience a loss of identity tied to your former career in retirement. This leads to uncertainty and self-doubt.
Anxiety: Concerns about health issues and financial stability are typical causes of stress and anxiety during retirement.
Debt: Existing debt or new financial obligations can strain retirement savings and limit financial freedom.
Elderly Care Costs: Providing care for aging parents or relatives is financially and emotionally challenging for many retirees.
High Costs of Living: Retirement savings are often dissolved faster than anticipated due to rising living expenses, inflation, and unforeseen costs.
Tax Implications: Managing tax implications on retirement income and savings is complex and costly if not planned properly.
Volatility: Economic fluctuations and market volatility affect investment returns and retirement income stability.
Is retirement planning enough?
Although financial planning is essential for a secure financial future in retirement, financial security alone may not bring true happiness. For many people, work is a central aspect of life and leaving the workforce can lead to a sense of isolation, discontentedness, and even feelings of grief for the life you are moving on from. Read our blog, Retirement Planning Beyond Finances: The Importance of Staying Socially and Emotionally Engaged to learn more.
What are the non-financial aspects of retirement?
The non-financial aspects of retirement are essential, but often forgotten, considerations for retirees who aim to lead fulfilling and balanced lives after their career journey has ended. 9 of these key considerations are outlined below.
Pursuing Interests: Many retirees explore new interests and hobbies like travel, teaching, or social and religious causes that bring them fulfillment and joy.
Transitioning: Gradual retirement helps ease the transition from a busy work life to life as a retiree. This helps with the adjustment to a new routine and lifestyle.
Emotional Preparation: Retirement comes with emotional ups and downs. Being mentally prepared helps retirees navigate the psychological aspects of leaving the workforce.
Healthy Lifestyle: Maintaining a nutritional diet and keeping fit helps retirees stay healthy and enjoy an active lifestyle in retirement.
Establishing a Routine: A daily or weekly routine helps retirees maintain productivity and satisfaction by providing structure and purpose.
Mental Stimulation: Learning new skills or hobbies and engaging in educational activities helps retirees stay mentally sharp and intellectually engaged.
Social Connections: Maintaining existing relationships and cultivating new ones is important for combating loneliness and building a supportive social network in retirement.
Purpose and Meaning: Finding meaningful activities in retirement helps to develop a sense of purpose and contributes to overall life satisfaction and well-being.
Planning for Healthy Aging: Programs and workshops that focus on managing healthcare costs and maintaining wellness help retirees preserve their quality of life.
A well-rounded retirement plan ensures that your retirement will not only be financially secure, but also happy, purposeful, and fulfilling. As independent financial advisers, Finpas works with you to develop comprehensive retirement plans that consider all aspects of your lifestyle, needs, and goals. We will help you navigate your unique transition into retirement and identify strategies to achieve your goals in all areas of your life.
Reference List
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Benefits of a retirement annuity (no date) Benefits of a retirement annuity | Standard Bank. Available at: https://www.standardbank.co.za/southafrica/personal/learn/saving-for-retirement (Accessed: 11 July 2024).
Pension and provident funds & ras explained | Old Mutual (2020). Available at: https://www.oldmutual.co.za/articles/pension-provident-funds-ras/ (Accessed: 11 July 2024).
Kleyn, K. (2023) A comprehensive guide to retirement planning in South Africa, Blue Chip Digital. Available at: https://bluechipdigital.co.za/financial-planning-retirement/a-comprehensive-guide-to-retirement-planning-in-south-africa/ (Accessed: 11 July 2024).
Kagan, J. (2023a) 5 retirement planning steps to take, Investopedia. Available at: https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp (Accessed: 11 July 2024).
Retirement planning guide: South Africa (2023) Just SA - Specialists in Retirement. Available at: https://justsa.co.za/individual-investor/retirement-planning-guide-south-africa/ (Accessed: 11 July 2024).
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