- Will you have enough money to retire? How much should you be saving in order to live comfortably in your golden years?
- Business Owners – Please read about John at the end of this document, in respect of retirement
- Leaving a Secure Legacy – ‘Parents take note’
The retirement lump sum
In order to retire comfortably it is estimated that we need a retirement income equal to 75% of our final salary. To meet this requirement on the day you retire, you will need to have savings worth about 16 times your annual salary. This startling fact is as a result of the present value of your income versus the future value of you income or the purchasing power of your income when you reach retirement and the inflationary impact thereafter. So, if your annual salary in the last year of working is R500 000, you would need investment assets of R8 million in order to generate an income equal to 75% of your salary.
How much to save: Younger savers can follow these guidelines, based on retiring at the age of 60
|Age you start saving for retirement||% of total Salary you should save|
How long to save for
The only way to save for longer is to keep working. If you are able to work until the age of 70, you will improve your retirement savings significantly. For example, if you start saving only at age 40 and want to retire at 60, you will have to save a massive 43% of your salary each year. If you delay retirement to age 70, you need to save only 18% of your salary. Working longer also adds to your vitality and longevity. If you can’t keep working, limit the withdrawals made from your retirement savings. In the first five years of retirement, it is critical that you try to keep your capital intact. While there is a temptation to draw the maximum amount, rather tighten your belt until you are 70 by limiting your withdrawal to around 3%. Most funds deliver a return of 3% after expenses and inflation, so by limiting your withdrawal to only your real return, your retirement funds will last longer.
Impact of investment returns
It is important to invest in a fund that provides a decent return after inflation. That means the fund must include growth assets such as equities and property although the government has legislation limiting the amount of equities you can invest in to 75%. If you invest in a more aggressive fund with a real return of 5%, you will need to save 12% of your salary. However, you would
need to be comfortable with the higher volatility that this fund would bring. If you select a more conservative fund with a real return of only 3%, you would have to save 18% of your salary from age 25. The Management of Financial Associates pride ourselves in our ability of matching various assets to specialist asset managers. Our methodology of asset and fund manager allocation produces consistent risk adjusted real returns (Return Above inflation). It is of utmost importance that your expectations are met at retirement. The graph below indicates exactly how we combine asset classes to produce desired results. The performance over the last 3 years of our fund choice combinations mean that the asset allocation is correctly applied creating efficient risk profiled returns.
Portfolio Comparison - Performance
Graph showing total return (%) from 27 March 2009 to 26 March 2012
Inflation-proofing your portfolio
In 2011 South African equities delivered below-inflation returns. Local equities also underperformed inflation in 2002 and 2008. Viewed over the longer term, since 1962 for example, the local equity market delivered real returns of 12% per annum. As such “investors should focus on long term investment objectives and not attempt to alter investment strategies based on shorter term market outcomes, which often have undesired consequences. Yet despite equities having historically delivered the highest inflation-beating returns in the long term, it does not mean investors should invest their entire portfolio in this asset class.
To demonstrate this concept the Underlying graph shows the performance of Financial Associates Moderate House View, consisting of less than 60% equities, over a 5 year term vs the JSE All Share Index.
3 Financial Associates Moderate Portfolio - Performance
Benchmark 1: FTSE/JSE All Share Index
Graph showing total return (%) from 26 Jan 2007 to 26 Mar 2012.
10 Rules for a Golden Retirement
1. Start as early as possible
2. Save as much as possible
3. Ensure you have a cost effective product
4. Ensure your portfolio is diversified optimally in terms of asset allocation, geographically and specialist managers
5. Take a long term view with trusted asset managers
6. Adjust your risk profile as you approach retirement
7. Use 30% of bonuses and 15% of salary increases towards retirement
8. Review your retirement position at least once a year – markets fluctuate
9. Reinvest tax rebates received on contributions back into retirement
10. If you are a business owner, your business is not your retirement
Between 2004 and 2007, I was fortunate to live on the West Coast in a nature reserve next to the coast. I met a neighbour who had the same fishing passion as I have and we became good friends. Let’s call him ‘John’. John owned a thriving hardware and building supply store which supplied most of the builders during the building boom from 2003 to 2008 in the Table View, Parklands and Milnerton area. John had no savings or retirement products as he believed his business was his retirement. He spent just under R130 000 per month on repayments for expensive cars and houses, excluding other spending. At that stage John could have easily afforded R40 000 per month on investments.
Over a 5 year period, his investment would have yielded R3 086 000.
In 2008 the housing boom collapsed and so did his thriving business. John lost everything and did not have a sent in a retirement annuity, which would have been protected from creditors. Retirement Contributions is another form of risk management and tax benefits. Make sure that your business is not your only form of retirement funding. The same applies to your primary house.
Leaving a Secure Legacy – Parents take not
There are a number of ways you can leave a legacy to your children.
|Legacy Methods||Setup Cost||Tax Rebate||Growth Tax|
|Inter Vivos Trust||High||No||Yes|
A Retirement Annuity purchased when your child is a baby, toddler, child or teen, can financially place your child 25 years ahead of his or her peers. The money is only accessible at 55 so there is no worry of it being squandered. What’s more is that any contribution not allowed as deductible now is allowed as a tax free commutation, and there is no tax within the Retirement annuity on income or growth. This can also be one of the best methods of financial education for your children. Assume your child receives R200 in pocket money; you could increase this to R350 only if your child is willing to contribute R100 to a retirement annuity. You will have to contribute another R100 to make up a minimum of R200 for a retirement annuity. This method teaches your child that a certain percentage of all money received or earned must be invested first, before any other spending occurs.