South Africans are not saving for retirement. According to the 2014 Sanlam Benchmark Survey, only 29% of employed South Africans are able to maintain their standard of living when they retire. Sure, taxes and the cost of living are high, but one of the main reasons that many South Africans don’t save for retirement is that they simply do not prioritise putting money away for their golden years.
“I see so many couples and individuals who are unnecessarily stressed when they realise that they’re going to run out of money,” says Stuart Kantor, the managing director of Kanan Wealth. “These are people who earn enough but haven’t saved enough, and they’re having to sell their homes and move in with their children.”
Stuart has outlined the five biggest mistakes he believes South Africans are making when it comes to retirement planning.
1. They don’t understand how much they need to saveJust like short-term savings, you have to start with a goal. It’s very easy to take out a retirement annuity or contribute to your employer’s fund, and hope that you’ve got your retirement covered. In reality, every person’s retirement needs are different, and you need to talk to a financial planner or banker and calculate what your retirement capital needs to be – and make sure that you’re putting enough away each month to save towards that.
2. They start too late When you’re in your twenties and enjoying your first job and the freedom that comes with having a salary, it can be difficult to start putting money away for a retirement that seems so far away. The truth is that it only gets harder to save the older you get because soon you’ll have car payments, a mortgage, children to educate and more lifestyle demands to meet. At the same time, the later you start, the more you’ll have to save each month to meet your ultimate retirement goal.
Start in your twenties to benefit from compound growth (where you earn interest on the interest you’ve earned) for the longest possible time.
3. They withdraw their pension contribution when they change employersWhen you leave a company where you have contributed to an employee pension fund, you will have the option to cash-in the policy – minus tax, of course. Many young people look at this as a windfall and blow precious retirement savings on clothes, travel or even something ‘sensible’ like a deposit on a house or car.
Instead, you should look at one of these three options to preserve your retirement investment and to avoid being taxed:
- Put the capital into a preservation fund, which is essentially a retirement fund that preserves the benefits accrued in the company fund, in your name.
- Transfer the money to a retirement annuity, which offers similar benefits.
- Transfer the money to your next employer’s pension fund, if they have one.
4. They think that a retirement fund or annuity is all they needJust because you are contributing to a retirement annuity or company fund doesn’t mean you’ve secured your future. While you can save up to a tax-deductible 22.5% of your gross non-retirement funding income into a retirement annuity or corporate fund, there are other investment products you should also be using to save.
These include tax-free savings accounts, which don’t attract tax on the growth of the capital, and unit trusts, which can offer greater returns than retirement products. Retirement funds have lower risks, but people shouldn’t be put off looking at higher risk investments.
5. They prioritise other costs over retirement Yes, living in South Africa is expensive. But many South Africans buy the largest house in the nicest area they can afford, when they’re not yet investing anywhere near what they should into their retirement plans. And they give in to the demands of lifestyle creep – where their lifestyles gradually become more expensive for no particular reason, as they earn more. A lot of the expenses that are seen as non-negotiable are in fact very negotiable indeed – but retirement, which no one should skimp on, is often neglected.
The bottom lineRetirement planning is a critical expense. What may seem like a distant possibility when you’re young, or an unaffordable extra when you’re burdened with the costs of raising children and making a home will become an urgent priority faster than you think. So make sure you get started early and save enough to earn you the rest you deserve later in life.