Discover why cautious retirement planning is vital for South Africans, as many face financial uncertainty due to inadequate savings. File Picture.
More than a million applications have already been lodged with the South African Revenue Service to pull funds out of their savings. Given that this amounts to R21.4 billion, that’s a frightening amount of money for a country that doesn’t have a savings culture.
This is according to Andre Tuck, Team Leader: Retail Investments at 10X Investments, who explains that with more people withdrawing cash under the Two Pot Retirement system, which came into effect on September 1, 2024, South Africans must ensure that they don’t erode their savings when they stop working.
“Before you consider withdrawing money under the Two Pot Retirement System, you need to carefully examine the purpose of the withdrawal, which should really only be for emergencies, and also look at the net effect it will have on your retirement funds,” says Tuck.
Tuck explains that, by the time someone retires, they should have paid off large debts such as a bond and a car loan. “However, retirees need to ensure that they can comfortably live after retirement and also need to consider that some expenses may increase, such as needing to upgrade medical aid or even consider assisted living,” he explains.
As a result, Tuck says people should carefully consider how much they need to invest so they can stop working without any serious money concerns. “South Africa has a culture of not saving enough money and needs to understand the consequences of how this will affect their lives, especially as people are living longer,” he adds.
10X Investments’ Retirement Reality Report indicates that 71% of South Africans are unlikely to have a retirement savings plan at all or just a vague idea of one.
Tuck breaks down how to work out how much to put away based on three key principles:
Multiply your final annual salary by 15
If, for example, your take-home pay is R25,000 a month in your final year of working, that would mean an annual salary of R300,000. To maintain your lifestyle after retirement, you’ll need around 15 times your annual salary, which is a lump sum of roughly R4.5 million.
However, if you are hoping to do things during retirement that you didn’t have a chance to do during your working years, for example, travel or hobbies, you should rather multiply your final salary by 20 or more.
To work out this amount, speak to a financial advisor who can help you determine what your final salary will be based on your age, and compound annual growth at inflation as a good indicator.
Save R1 million for every R5,000 you want to draw down as a pension every month.
Another option is to work backward and determine how much you will need to effectively pay yourself in multiples of R5,000. Then, save R1 million for every R5,000.
Multiply your monthly needs by 300
One of the simplest calculations is to multiply what you think you’ll need per month (say R25,000) by 300 to determine the lump sum you will need to have saved (R7.5 million in this example). While this results in a slightly higher figure than the first two options, it’s less risky.
Tuck says that the best way to save for retirement is to take out a retirement annuity, which allows money to grow on a compound basis, ensuring that it works for you. “Ensure that you are committed to paying into this plan every month, which you can do through, for example, a debit order.”
Because it is difficult to work all this out and determine where to invest, Tuck recommends speaking with an investment consultant or financial advisor.
Retirement investment and financial freedom are unique to the individual and look different for everyone depending on your goals and quality of lifestyle. In this way, it needs to be planned holistically with your financial advisor who will provide a personalised breakdown that considers your age and current salary to work out how much you need to have put away.
By planning early, and investing wisely and meticulously, everyone has the opportunity to reach their financial investment goals and ensure that they achieve financial freedom.
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