In this series of articles, we’re giving you the advice you need on how to set yourself up for financial freedom. Our aim is to give you practical steps each month – action points that you can take immediately. Follow these steps over the course of the series and you will be set up for financial wellness.

Just a note: this is not about reinventing the wheel or giving you the inside scoop on the next Naspers, Capitec or Cryptocurrency. Instead we will focus on solid financial planning to ensure that you can retire comfortably, afford that holiday to the Maldives (yes, a villa on the water), secure some capital for a business dream or put money away for your children to get a proper education.

One word you’re going to have to get to grips with if you aren’t already, is SAVINGS. Saving a portion of your salary consistently is the best way to achieve your dreams, unless you’re Elon Musk, then you don’t need to read this.

“Do not save what is left after spending, spend what is left after saving,” – thanks Warren Buffett (one of the wealthiest men in the world).

In our first article we will focus on the most important part of holistic planning: retirement.

 

RETIREMENT

This is a foreign concept to most people, but have you ever wondered who will pay the bills when you are older, need to stop working and formally retire? Do you want your children to look after you; or do you want to enjoy your last year’s free of financial worry; or even spending those days ticking off items on your bucket list?

In South Africa, you are on your own when it comes to retirement. The State pension is a measly R1600 per month! Even if you work for a large company with a pension fund, it is likely that you are not contributing enough to fund your retirement.  In most cases you need to ensure that you look after your own retirement nest egg.

 

WHY WORRY ABOUT RETIREMENT AT 25?

The most common mistake we make when it comes to planning for retirement, is to start too late. “I am still in my 20’s – there is so much time before I retire. Besides, it’s much more important that I pay off my house and car first. Where must I get the money to save as well? “Sound familiar?

A Retirement Annuity (RA) is an investment product specifically designed for the person who does not belong to a company pension/ provident fund. Contributions toward this investment can be deducted from your taxable income (max of 27.5% or R350 000 annually) which means that you will get money back from SARS should you make contributions. SARS sponsors your retirement savings. How awesome is that?

Let’s look at an example. We assume you need R20 000 a month (in today’s money) to live on from the age of 65 until you die.

The table below illustrates what you need to contribute monthly to make that happen – assuming you start at different ages:

The sooner you start, the easier it will be to secure your financial freedom. The longer you delay, the longer you will need to work to make someone else rich.

 

DANGER AHEAD

The single biggest pitfall for those with a pension or provident fund is the ability to take a portion or full amount saved for retirement as a lump sum withdrawal upon resignation.

Picture this scenario:

You resign from your current employer and HR asks whether you want to receive your pension payout in cash or transfer to a preservation fund. It will be heavily taxed if taken in cash, but you are 30 years old and a long way from retirement so you decide to cash out and buy yourself a sweet new ride.

Amount cashed in:          R200 000

After Tax:                         R169 500

Potential Value at 65:     R1, 500,000 (In today’s Money)

Opportunity Lost:            +- R8,500 monthly in your 35 retirement years after the age of 65.

Can I recover:                  Yes, by contributing R1000 every month for the next 35 years.

Your new wheels don’t cost you R169 500. In fact, they cost you R1.5m!

You need to keep your “retirement” hat on and transfer these funds to a preservation fund or retirement annuity tax-free. Allow these assets to grow over your lifetime! You will be thankful when you are old that you took this little piece of advice.

ACTIONS POINTS FOR THE MONTH

If your employer has a pension/ provident fund:

  • Find out if your employer matches your contribution up to a certain percentage. If they do, try and bump yours up to get the full benefit.
  • Find out what you are invested in. Don’t make the mistake of investing too conservatively as you have a 20 – 30 year investment horizon. Risk dissipates over time. You can take on more risk with this investment. Cash might be doing well now but over the long-term shares give a far better return.
  • Calculate the percentage of your income that you contribute. If the total of both yours and your employer’s contributions add up to 15% of your gross income you are doing much better than the average South African. Pat yourself on the back.

If your employer does not have a pension fund:

  • Open a Retirement Annuity
    • Look for a new age retirement annuity with no upfront fees
    • Fees are important in the long run
      • 2% saving in fees could save you R400 000 over the next 30 years on a conservative contribution. Read more here . 
    • Some people need an adviser so make sure the person is independent and not just selling you one of their products.
  • Set up a monthly payment or debit order – even if you start small, stick to it. The seventh wonder of the world is compound interest (Einstein’s words). You will be amazed what your “small” contribution will be worth after 10 years.

In a world where people are constantly chasing the next best “get-rich-quick” scheme, we leave you with the following quote from economist Paul Samuelson:

 “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Foundation Family Wealth now offers a consultation service for young people who are serious about money. Contact thiart@foundationsa.com to find out more.

<Foundation Family Wealth is an Authorised Financial Services Provider>