It’s not too late to start investing, but you may need to adjust your approach:
For many South Africans, employer-provided pension funds are the cornerstone of retirement savings. These plans, supported by both employee and employer contributions, foster a disciplined saving regimen. Recent reforms, such as the introduction of the two-pot system, have significantly strengthened the robustness of South Africa’s retirement savings framework, mitigating the risk of premature fund depletion upon resignation.
However, not everyone benefits from an employer-sponsored pension plan. Self-employed individuals or those without access to such plans can opt for a retirement annuity to build their retirement nest egg voluntarily.
Regardless of the chosen savings method, a widely accepted guideline is to save 15% of one’s gross salary over a span of 40 years. Adhering to this strategy and investing in a balanced fund should ideally yield an income replacement ratio between 65% and 75% upon retirement.
If you find yourself 20 years into your career without substantial retirement savings due to life’s unforeseen financial burdens—such as divorce, significant uninsured medical expenses, or supporting children—do not despair. According to the 2023 Retirement Reality Report by 10X Investments, based on the Brand Atlas Survey, South Africa faces a significant challenge in retirement preparedness. The report reveals that only 6% of the population is on track to retire comfortably.
It’s never too late to start. Although it will require an adjusted, potentially more aggressive approach, immediate action, focused saving strategies and possibly extending your working years are essential to compensate for the delayed start.
Strategic Actions to Amplify Your Retirement Savings:
- Assess Your Position: Begin by realistically evaluating your potential retirement expenses. Start with your current expenditures and adjust for anticipated inflation. Consider significant costs like healthcare, home and vehicle upkeep, and the financial independence of your children. Adopt a frugal lifestyle now, which not only allows for increased savings but also prepares you for a modest retirement lifestyle.
- Increase Risk Exposure: Contemplate raising your investment in both local and global equities. This approach can enhance your returns but comes with increased risk and the potential for losses. Intelligent risk-taking in foreign markets might accelerate gains, yet unconventional risks often result in setbacks.
- Engage in Life-Enriching Activities: Plan for hobbies and travel that enrich life and maintain mental health during retirement.
Prioritise Key Financial Strategies:
- Boost Savings: Commit a substantial portion of your income to retirement savings, utilising tax-advantaged vehicles whenever possible. Cultivating frugality now benefits your future financial independence. If you are a member of a pension or provident fund or have an RA and wish to boost your retirement savings, you can contribute up to R350,000 per year, which is fully tax-deductible from your gross income. It’s important to note that both you and your spouse can each benefit from these tax deductions individually, depending on your respective taxable income situations.
- Similarly, tax-free savings accounts provide investors with the opportunity to contribute up to R36,000 each year, with the added advantage of tax-free investment returns. However, it’s important to note the lifetime contribution limit of R500,000. If you consistently maximise your annual contributions, reaching this cap will take about 13.8 years.
- Extend Your Career: Each additional year in the workforce means more savings, compounded returns, and one less year of retirement funding required.
- Invest in Risk Assets: With more than five years until retirement, consider allocating up to 75% of your portfolio to equities via market tracker ETFs, with a portion in actively managed funds. Below is a good indication of where the returns have been over the past ten years (in ZAR):
5. Consider Leverage Wisely: For those in their early 40s with insufficient retirement savings, leveraging investments in equities with expected returns over 12%—coupled with tax benefits from pension funds or annuities—may be more advantageous than rapidly paying off a mortgage at a 9% rate. It should be noted that this strategy comes with substantial risk and is certainly not recommended for all investors.
Engaging with a seasoned financial advisor can illuminate the path to a secure retirement. These professionals provide invaluable insights and strategic advice that can transform your financial future without any upfront cost.
In conclusion, while it may seem daunting to start saving for retirement later in life, with strategic planning and disciplined execution, it is entirely possible to build a comfortable retirement fund. Remember, the cost of inaction is far greater than the effort required to secure your future.
