Peter asks: I am 57 years old and I have minimal retirement funds.
What I do have is R300 000 saved that I need to invest.
I have a new permanent job with a gross salary of R36 000 with 6,5% pension deduction and my employer puts in about R3 900pm.
I live frugally and have about R12 000pm left to invest. I have a professional degree and hope to work way beyond normal retirement age.
Should I invest in a flat or rather in some funds? Also, would you agree that I should invest in a retirement annuity (RA) to save on tax?
Maya replies:
The rule of thumb is that you need to save 13 times your annual salary as a retirement nest egg. That means you would need to save R5,6-million.
The good news is that the longer you work the less you have to save as there are fewer years to fund and you have given your investments a chance to grow. For every five years that you delay retirement, your retirement fund would grow by about 60% (assuming a 10% per annum growth rate).
If you invested the R300 000 and continued to save your pension (R6 240) and your R12 000 discretionary investment, you should have accumulated R4,5-million within 10 years if your investment grew at 10%.
If your investments grew at 12% that figure would be R5,1-million.
The above example removes all assumptions about inflation and salary increases — but these offset each other so the example is still relevant.
Remember your final salary in 10 years’ time will not be R36 000 — it would be closer to R60 000, so your actual target figure is R9-million. But don’t panic — as long as you increase your savings by your salary increases each year you should be on track to reach it.
I would suggest you sit down with a financial adviser to calculate your retirement requirements. This will give you a very clear idea of what you are aiming for. You will also be able to understand the variables that you can use to improve your retirement nest egg.
For example, if you delayed retirement to 70 years old and gave yourself an extra three years, the R4,5-million could grow to R6,8-million. But also remember that as an employee your retirement age my not be fully in your control.
Retirement annuity
Financial adviser Gregg Sneddon makes the point that you probably won’t benefit currently from the tax benefits of a retirement annuity (RA) given that you are part of a pension fund and your non-retirement income (that portion such as car allowance and bonuses) would be quite low, and therefore the tax benefits would be quite low.
The good news is that from March 2012 you will be able to save up to 22,5% of all income into a retirement vehicle before tax. So next year definitely look into contributing to an RA as currently you are only investing around 17% into a retirement vehicle.
Another option is to ask your employer if you can increase your pension contribution into their pension fund. Whether or not you can will depend on their rules.
Property
In terms of where to invest your lump sum, property is an option but you need to understand the risks involved.
There are tenant issues and you need to make sure you understand the law and vet your tenants carefully. Property is also not easy to dispose off if you need to access the funds.
Property is possibly undervalued at the moment as it is very much a buyers’ market and you may see some capital gains over the next 10 years.
Also remember that any income you receive from your property is taxable. It would make sense to take out a mortgage on the property in order to offset the tax obligation and have a tenant pay off the property.
Ideally you would want the property paid off by the time you retire and generate an income in retirement when your tax rate is lower.
Read our related articles on property and also go to www.hope.co.za
Unit trusts
Although you have some time before retirement, your investment time frame is limited, so full exposure to equities may not be a good idea.
Sneddon recommends investing your monthly savings in an “inflation plus” fund. These funds aim to outperform inflation by a certain percentage and have a mix of various asset classes including shares, bonds, offshore and property.
You could opt for a fairly aggressive fund and then switch to a less aggressive fund three years before retirement. Most of them have beaten their benchmarks with limited volatility.
Fund managers that are favoured by the independent advisers include Coronation, Allan Gray, Investec and Prudential.
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