RETIREMENT PLANNING

Around half of South Africans do not have a retirement plan, while as few as 6% are able to retire comfortably. 90% of South African retirees cannot maintain their standard of living prior to retirement, and two-thirds of members have less than R50,000 in their retirement fund.

To retire comfortably depends on personal circumstances, however a 75% replacement ratio of your current income in future values is considered a reasonable target for members in general.

On average, members should contribute 17% of their salary over 40 years (from age 25 to 65) towards their retirement savings to achieve a 75% replacement ratio.

A recent study found that more than half of workers said they expect to still be working past age 65. By comparison, less than 15 percent of today’s retirees kept working that long. If you plan to work longer to get by in retirement, you are going to be in trouble. Working past retirement age should be a complement to a solid savings and spending plan, not the foundation.  It’s simply too risky to assume you will indeed be able to work longer.

While the long-term benefits of investing through a retirement annuity cannot be overstated, there’s a lot more to this impressive retirement funding structure than meets the eye. Here’s what to know.

Below are three different retirement annuities available for your pre-retirement needs:

When you retire from your pension or retirement annuity fund, you must reinvest two-thirds of the money to ensure a future income. You can either invest in a guaranteed life annuity or a living annuity:

LIVING ANNUITY

One of the main advantages of a living annuity is that it provides flexibility. Each year the investor can adjust the annual income drawdown percentage of between 2.5% and 17.5%. Another advantage of living annuities is that they allow for having the remaining capital paid out to nominated beneficiaries when the investor dies, or to their estate in the case that no beneficiaries are nominated.

However, the main disadvantage is the risk of depleting the retirement funds before the investor dies. Therefore, it is extremely important to live within your means and not withdraw too much. 

LIFE ANNUITY

A life annuity provides a pre-determined monthly income, for the rest of the investor’s life. A life annuity is a good option for those who are anxious that their retirement savings may be depleted prematurely, or if they seek comfort by having a guaranteed income for the rest of their lives.

The income provided may either be a fixed rand amount, or an amount that increases with inflation each year. One of the issues with a life annuity is that the income is fixed/pre-determined, thus there is no flexibility offered. However, the main risk is that should you pass away, the money dies with you – effectively meaning there is no remaining capital to leave to your beneficiaries or estate.

Both life and living annuities allow you to leave a financial legacy. Any remaining balance from a living annuity is automatically passed on to beneficiaries, whereas in a life annuity, you can opt to include additional income legacy features to provide for your spouse and family in the event of your early death.

While it’s never too late to start saving for retirement, the sooner you begin and the longer you stay invested, the more you’ll benefit from the value of compounding interest.