Your mindset in your early working life will determine how easy saving for retirement is, and how well you will live out your twilight years.
The last thing anyone wants is to be short of money in your retirement, a time when you are meant to be enjoying your grand children, travelling and generally doing exactyly what you want. Perhaps playing Golf every day is your thing, or growing exotic orchids in your garden. Whatever you choose to do, you will need enough money to sustain you.
Firstly, lets look at what the maximum allowable investment in retirement funding is before tax. You are allowed to invest a maximum of 27.5% of your taxable income into retirement investments. The amount up to 27.5% of your taxable income is deducted from your gross income and can be a very real saving in terms of tax, by putting you in a lower tax bracket. We highly recommend that you do the calculations to seer which tax bracket you will be in after retirement investments are deducted from your gross salary.
Any way you look at it, the higher your contribution to retirement savings, the more tax savings you will enjoy.
The culture of saving for retirement
Start saving as much as you can as early on in your working life as you can, is a culture that every working person should be following from their very firsyt paycheck. To put it bluntly, if you start out with that attitude, you will make your retirement a whole lot better.
The new breed of 20 something people entering the workforce seem to have an instant gratification mentality as a general rule and are perhaps less inclined to think of how they will fund their lifestyles at age 65 or over. People are living longer which means we have to adjust our retirement thinking from having enough to last us 20-30 years to having enough to last us 40 years or more. It has been said that the fiorst person to live to 200 years old has already been born! See the fin24 article
I am 53 years old, so let us assume that with advances in medical science at prolonging my life from an expected 95 years (I have longevity in my family with most grandparents living into the mid nineties), to 125 years. That is an additional 30 years I have to fund my retirement! This is a very scary thought which is a very real possibility.
Listen to your financial adviser
If you have ever been to a presentation by aq financial advisor where there are economists and financial market commentators present, you will hear them all hammer on about starting to save early on and perhaps most importantly, staying invested through the ups and downs of the market. Investing for retirement is for the long term, and the longer the term you stay invested, the better your returns will be.
There are countless examples of people trying to predict what the markets will do, or the effects of panic selling which support, “staying invested through the ups and downs”.
Create a savings habit
We are presented with temptations and opportunities to spend our money every minute of the day. To start a savings habit, make yourself aware of what a small saving, like cutting smoking from 20 cigarettes a day to 10 a day will mean and save that amount every day.
In Feb 2020 a pack of Peter Stuyvesant / Marlboro cigarettes costs R40.00
By simply cutting your cigarette smoking to 10 per day, you could save R20/day, R140/week and as much as R600/month
That is R7200/year
In this example, if you took the health benefits and saving on future medical issues, that amount would be significantly higher. As a smoker you pay higher health insurance, life insurance and will have a lot more medical expenses.
If you made your coffee at home and did not buy your morning Latte at R35.00
By not buying a Latte in the morning, you could save R35/day, R245/week or as much as R1050/month
That is R12600/year
Habits like this are difficult to stick to as you are bomkbarded with special offers and savings every day. Develop the discipline to save and watch your savings grow.
The power of compound interest or compound returns
Take your savings and put them into a savings account or monthly investment like unit trusts, RA, or other long term investment and leave it there. Always select the option to reinvest the interest/returns. This compound interest effect is an incredibly powerful way to grow your savings.
It is only when you retire that you want to start taking money from your investments that will reduce the capital amount.
Taking advantage of all of the Tax Incentives available
We have spoken about investing your maximum allowable amount in retirement funds and we must never forget that there is a Tax Free savings account available to you, which allows you to save R33 000/year or a maximum of R500 000 in your lifetime completely free of tax. Read more about Tax free savings and investment accounts.
There are many funds available to investors, each with it’s own level of risk. It is really important for you to discuss your retiorement plans with a financial advisor. This will help you and your advisor determine your propensity for risk and which funds to be invested in. At each stage of life, your investments should reflect your propensity for risk. The rule of thumb being, the closer to retiremkent you get, the less risk you should have in your portfolio.
Read about a balanced portfolio and how the portfolio is structured.