Having a comfortable and enjoyable retirement and being able to maintain our independence throughout our golden years is one of our biggest goals in life but it is also one of our biggest concerns. With less than 10% of retirees being able to maintain a similar living standard when they retire, most South Africans may feel that the retirement they will want and deserve for themselves is out of reach for them, but is it really?
It is fair to say that not all of us can or will retire as millionaires, however, we can according to our own personal circumstances and certain limitations that come with our circumstances, be able to plan for and achieve a good retirement, one that can give us peace of mind, certainty and independence. How can I achieve this? I hear you say. Well firstly, you need to really pay attention to your retirement goals, you need to identify what kind of retirement you want for yourself and work towards that goal consistently.
There are a few things you need to be aware of when identifying and setting those goals though, there are some of the things many aspiring retirees forget to factor into their retirement goals and thus end up with a shortfall when they do retire and as such have less disposable income then they anticipated. We are going to mention a few things below so that you are aware of them.
Medical Aid:
Medical aid for many of us is partially subsidized by our employers throughout our careers, it can come as a big shock when you retire, for example if your income at retirement from your annuity pays you R15 000pm after tax but your medical that was R3 500pm all of a sudden becomes R7 000pm. That means that half of your income, is all of a sudden going on your medical aid. When you factor in other costs such as municipal accounts and groceries, you may not have much left for yourself. We all need access to good medical care throughout our lives but when we get older, it becomes even more important. You should be aware of this cost and do all you can to plan for it.
If you find that you are not in a position to build this expense into your forecasted budget expenses at retirement, you may need to look at other options available to you, such as moving to a lower level of cover or even to a hospital plan and possibly look to cover any shortfalls or co-payments with a good Gap Cover. Be sure to speak to an Adviser who specializes in Medical Aids and Gap Cover if you have existing Chronic conditions and taking chronic medications before making any changes to your medical aid.
“Money in the Bank”:
In retirement planning, we talk of two kinds of money or investments, we talk of compulsory money, this the money you have in your retirement annuity, pension or provident fund or your preservers, this money is governed by certain regulations and restrictions, for example, on a retirement annuity or a pension fund, you can only get 1/3rd of your money paid out to you, into your bank account (after paying a lump sum tax based on the retirement lump sum tax table at that time), the other 2/3rds must be used to purchase a compulsory annuity (hence the term compulsory money). This compulsory money can either purchase a life or a living annuity and these two types of annuities are essentially there to cover your monthly expenses or income needs. The first priority in retirement planning is to be able to cover your monthly income needs for the specific term you have planned for, be it 15 or 20 years for example. A life annuity has no flexibility to it and a living annuity has very little, neither annuity type allows for an option to withdraw a lump sum amount to cover an emergency need.
Now, that 1/3rd you can have paid out to you and the other money you have in the bank or within a Unit Trust or an Endowment, that money is called your discretionary money, it is your disposable money, more importantly, it is money that doesn’t have any restrictions placed on it, so if you need more one month, lets say your geyser bursts and your insurance doesn’t cover geysers or the damage within your home, you can use this money to cover that larger once off lump sum need of say R15 000 – R20 000. This discretionary money should also factor in a few other things, such as your pre-retirement medical funding, lets say the funding you need to cover your medical aid once you retire or if you don’t have Gap Cover and need to do a co-payment or cover a shortfall on your medical aid because they didn’t cover the anesthetist cost during your knee or hip replacement at 72 years old.
You may also wish to plan for buying a new car 10 years into your retirement and you may want to pay cash for it, even when looking at downsizing your home or going into a care facility as you start to need that kind of care, maybe you would like to go on a holiday by the sea or a national park every year, these are all the kind of costs that you need to factor into your discretionary money.
The dreaded tax man:
So, you spend your whole life paying taxes, you get to retirement and you feel you have done your bit for society, I agree with you but the tax man, not so much. When you take a lump sum (some of that 1/3rd of your retirement savings), this money will be taxed according to the retirement lump sum tax table that is relevant in that year of assessment. You are also going to pay income tax according to the income you get from your annuity payments and from any other sources such as any properties you own and rent out, even the interest that you earn on your “money in the bank” will add to your income tax burden every year.
It is important to speak to a Retirement Planning Specialist to help you to incorporate tax planning into your retirement plan, contributions into retirement savings before you retire is tax deductible up to 27.5% of your taxable income, not only is it tax deductible but the money you place into a retirement savings vehicle has no tax on the growth of the investment, so no tax on interest or dividends earned and no capital gains taxes on switches between funds. If you use other products to compliment your traditional retirement saving vehicles, such as a tax-free investment, you can use a drawdown from your tax-free investment to offset your income tax liability after you have retired, by splitting the income you need every month between your annuity payment and your tax-free investment. This means not only will your income tax liability be lower, but you will get more of your money out for yourself each month due to a lower tax liability.
It is important to start your retirement planning as early as possible, this will give you a greater opportunity to reach your goals successfully and to make the most of your time to take advantage of tax planning in both your pre-retirement investment strategy as well as your post-retirement income strategy. Be sure to work with Advisers or Financial Planners who are specialists in retirement planning to get the best advice and help in building your retirement planning strategies.
Take a read of our blog on “The Progressive Satisfaction System” and “Retirement and Tax Planning” if you haven’t read them already.
If you would like to know select the “Request a Call Back” tab on our Website or go to our Facebook page and send us a message directly and we will get back in touch with you and arrange a complimentary no obligation, no cost Financial Analysis to determine at which life stage you are at and what your needs are at this moment. It is highly recommended to consult with an accredited Financial Adviser when making decisions of a financial nature.
The contents of this document are for generic information purposes only and do not constitute advice or intermediary services as contemplated in the Financial Advisory and Intermediary Services Act, Act No 37 of 2002 (FAIS). Whilst every attempt has been made to ensure the accuracy of the information contained herein, Myself, Liberty or Stanib cannot be held responsible for any errors that may be represented. You are requested to consult with an accredited financial adviser prior to making any decisions of a financial nature. Performance will depend on the growth in the underlying assets within the portfolio, which will be influenced by inflation levels in the economy and prevailing market conditions. Past performance cannot be relied on as an indication of future performance. Unless stated otherwise, returns can be negative as well as positive. Liberty Group Limited (reg no 1957/002788/06) is a registered Long-term Insurer and an Authorised Financial Services Provider (FAIS no. 2409)
