A recent statistic indicates that only 5% of South Africans can afford to retire comfortably. This alarming figure should serve as a wake-up call to all of us – can we really afford to retire?
Retirement – What Is Needed
In order to retire, you’ll need to have a guaranteed income that covers your monthly expenses plus unforeseen costs such as medical bills, which tend to increase as you get older.
- Ideally, your retirement income should equal your last monthly salary, plus 5% to 10% extra which should be reinvested to keep pace with inflation.
- In order to generate this type of monthly income once you have retired, you will need to have saved and invested about 10 times your last annual salary, depending on interest rates. This means that if you earn R20 000 a month after taxes, you will need to have amassed at least R 2.4 million in your retirement fund.
Other investments including shares, property and unit trusts, may contribute to your retirement income. However, because these investments sometimes fluctuate it is important to have a good retirement plan to provide you with annuity income.
It is also important that the home you live in during retirement, whether it is the home you currently live in or a smaller property purchased for your retirement years, is paid off before you retire.
The Benefits of a Retirement Annuity
A Retirement Annuity (commonly called an RA) offers several benefits over other forms of investment. The contributions you make to the fund and the growth in the fund are not taxed, and a portion is tax free at maturity.
With the recent dividends tax, capital gains tax, and other taxes which are levied on other types of investments, a Retirement Annuity ensures that your contributions form part of your capital and are not lost to taxation.
RA’s are also managed in terms of regulation 28, which sets out clear guidelines to ensure that your contributions are invested in medium risk investment classes – this prevents losses over time to preserve your retirement capital.
As a piece of advice, investors should resist the urge to cash out any part of their retirement funds before they retire. Most RAs do not allow this, meaning that your contributions are reinvested during your working life to provide you with stable income once you retire.