Retirement looms at the end of our careers. Even though we might not want to retire, businesses force people out. South Africa is now looking at bringing down the retirement age, putting more pressure on individuals to retire.
Personally it saddens me, as those who are older have the most experience, have survived financial, economic and political crises and are able to offer valuable insight and perspectives to business. But businesses want new, fresh ideas and a lower wage bill, hence the move to retrench or retire the older employees. Some might be able to consult in their area of expertise but for the most part, retired people are at home.
So how best to save and plan for retirement? The conventional and most easily accessible way, is using any of the retirement vehicles. These are retirement annuities, provident or pension funds. It is easy to calculate the shortfall at retirement and save accordingly. The investment grows by monthly debit order or lump sums and clients can choose unit trusts according to their risk profile. Premiums are tax deductible and no tax is payable in the fund, making it a very tax friendly investment. It is also protected from creditors, preserving your retirement saving no matter the financial crisis.
Another option is property – either local or offshore. Purchasing a property and having tenants pay off the bond prior to retirement, is one way of saving for retirement. At retirement, once the property has been paid off, the rental income forms part of one’s retirement income. The rental income is deemed as income and will be taxed as per South African tax tables. But there are deductions, such as interest, rates, levies and maintenance. One of the drawbacks of rental income at retirement is that tenants may default in paying rent resulting in a loss of income and perhaps even having to deal with the stress of evicting tenants. The worst case scenario is when a property remains vacant for an extended period of time.
Some clients also buy art, Kruger Rands, or other assets that appreciate over time. All these assets can be sold at retirement and can form part of the retirement provision.
Before we retire we might think that we will have so much less expenditure in retirement: the children will be out the house, our home paid off and no more school or university fees. Yet inflation is higher for those in retirement. Inflation is calculated as the cost of a basket of goods. The contents of the basket include groceries, clothing, technology, petrol etc. A retired person uses less of the low inflationary items, such as clothing and technology and will use more of the high inflation categories such as groceries, petrol and medical care. All three have above inflation increases, which means those in retirement have a higher average inflation than those still working.
It is therefore good to save for retirement, the sooner the better! It is never too late to get the nest egg growing.
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