Planning for your retirement

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Planning for retirement means determining how much money you will need – the sooner you establish what you need, the more time you will have to work towards reaching your goal and being prepared for your retirement.

When we are young, retirement seems a long way off. We cannot imagine what it must be like to be old and no longer employed. Often, we assume that our current income will continue for the rest of our lives.

Start Early

If you do not like the idea of being dependent on your children or the state or having to rethink your lifestyle once you have retired, you need to start planning now for the time when you will no longer be able to work and earn a salary. The sooner you start, the more chance there is that you will be able to enjoy your golden years, without compromising the lifestyle that you are used to.

Is your aim to retire with enough money to live comfortably for the rest of your life? If so, you will need a lump sum of between 8 – 10 times your final annual salary when you retire. This lump sum would then be invested to provide you with a monthly income for the rest of your life. This is only an estimate and, as you might know, people are living longer and medical care is becoming more expensive. So, the more money you can accumulate during your working years, the better your chances of being financially secure when you retire.

Harnessing the power of compound interest

It is possible to make your money work for you. The earlier you start saving, the more you will benefit from compound interest. Small amounts invested when you are young will end up being worth more than much larger amounts invested when you are older.

To benefit from compound interest, you must keep reinvesting the interest you earn on your investments so that you earn interest on your interest. For example, if R100 grew by 10% per year, after the first year you would have R110. The next year, you would earn interest on R110, giving you R121.

The following example shows the effect of compound interest, where starting earlier can make all the difference:

Steven Theresa
Starts saving at age:
Initial lump sum invested:
Annual lump sum contribution:
Investment period:
Total amount invested by age 55:
Projected growth per year:
Final projected value at age 55:
26 years of age
R2 500
R1 750
29 years
R51 500
15%  p.a.
R802 236
34 years of age
R2 500
R2 450
21 years
R51 500
15% p.a.
R335 689

Even though Steven and Theresa invested the same total amount, Steven had a head start of 8 years and invested less each month. However, by starting earlier, Steven managed to accumulate almost R470 000 more than Theresa due to the power of compound interest.

Your retirement savings may be one of the most valuable investments that you will ever make. The longer you belong to a fund, the more money you will have when you retire. If you change jobs and spend the money that you get instead of reinvesting it, you cannot make up for the lost money later. There will not be enough time for compound interest to work for you. Therefore you should seriously consider preserving your withdrawal benefits in a preservation vehicle to continue to earn compound interest. Please refer to the next section for more details.

Drawing up your retirement plan

A retirement plan starts off by calculating the monthly income you will need once you have retired. This amount will depend largely on your personal circumstances and long-term goals and should take into account any debts at retirement, family responsibilities, etc. Once you have calculated the capital amount you need, you should list the investments you have which can help you to reach your goal.

Do you have long-term savings (in addition to your retirement fund) such as an endowment policy, unit trusts or a retirement annuity that will provide you with an income once you have retired? These savings vehicles will help you in reaching your retirement plan goals.

Once you have established the value of these investments, you will have a fairly good idea of whether you will have a shortfall. If you do have a shortfall, then you may want to consider making additional savings in order to reach your goal. By actively managing your retirement fund savings, you can maximise returns during your working years.

Remember to adjust your retirement plan as your circumstances and goals change over the years.

Financial advisers

Saving for retirement is not about guessing how much you need or how much you have; it’s about planning and investing today to make sure you are prepared. Because we all have different personal circumstances and financial needs, your financial needs and dreams at retirement will probably be different from those of your friends or colleagues.

A good financial adviser is someone who can help you assess your needs and develop a long-term investment strategy to reach your retirement plan goals. He or she will give you objective, appropriate advice to help you achieve your long-term financial planning objectives.