When you retire, don’t you want to know that your finances are in order so you can enjoy a comfortable life after work? The best way to start the journey to financial wellness in your later years is to start saving for retirement as early as possible. In this article, we’ll discuss when you should start saving as well as what you need to know about one of the most recommended savings products: a retirement annuity.
When should I start saving for retirement?
It’s suggested that you start saving for retirement as soon as you earn a stable income and can afford to pay the monthly premium. You are probably saying, ‘I do want to save, but I can’t right now.’ Well, it should be possible by making a few adjustments to your spending habits to accommodate saving for retirement. It’s completely understandable that you want to treat yourself from time to time, but rather save money for this purpose instead of putting it on a credit card; you’re increasing your debt.
Did you know that you can invest in a retirement annuity (RA) for only R500? It costs more per month to have a satellite premium subscription; one designer shirt can cost thousands of rand. So, with some tweaks to your spending habits, it should be achievable to free up this amount to contribute to retirement savings.
How do I get a retirement annuity?
If you’re not sure where to start, it’s best to speak to an independent financial adviser. Reputable IFAs will take the time to understand your personal and financial circumstances and help you put a solid strategy in place which can be tailored to your goals. IFAs aren’t affiliated with any insurance company or annuity provider and therefore recommend a financial institution that offers the best possible terms to grow your savings.
Benefits of saving early for retirement
You can extract the full potential of compound interest, by starting to save early and consistently over a long-term period.
What is compound interest?
Think of compound interest (also known as compounding) as earning money today, on top of the money you earned yesterday. Essentially, compound interest accelerates the growth of your contributions.
Let’s break this down:
The amount of interest is calculated only on the principal amount of money you contribute.
The interest calculated on the initial principal amount AND includes the accumulated interest from previous periods on your monthly contributions. When calculating compound interest, the number of compounding periods makes a significant difference; that’s why it’s strongly recommended that you start saving for retirement as early as possible.
Benefits of a retirement annuity
- Your contributions are tax-deductible, and the funds are protected owing to the restrictions of a retirement annuity.
- You can invest a minimum of R500 per month.
- An RA complies with the prescribed legal investment limits – these limits control the amount of exposure to certain asset classes. This allows an investment manager to spread your investment across several asset classes, reducing investment risk.
- Barring exceptional circumstances, you can’t access the RA funds until you’re 55 years of age or older. Remember that the longer the investment period, the more you can benefit from compound interest. This means you have the reassurance your money will continue to grow over time.
- Exceptional circumstances: Permanent disability. You can apply for early retirement if you become permanently disabled and cannot perform your job.
- You can also access your money if you decide to emigrate.
- You can decide how much to invest. You can stop your contributions if you hit a rough spot and restart investing when you feel the time is right. There are no fees, penalties and no notice periods required when these changes are made.
So, to start successfully saving for retirement, please ensure that:
- All your financial objectives are clearly defined. This should be built into a financial plan. It’s best to ask an independent financial adviser to help you draw up a plan that suits your specific situation.
- Think logically, not emotionally.
- Always think of the long-term benefits, e.g. reaping the full rewards of compound growth.
The bottom line is that saving enough to be financially secure once you’ve retired may seem to be unnecessary when you’re in your 20s and 30s, but time passes quickly; you need to start saving as early as possible. Beyond the practical benefits, it also instils responsible financial management skills that you’re going to need throughout your life.
If you combine a disciplined approach with a feasible financial strategy, you’ll have peace of mind knowing that your financial future is under control.
BONUS TIP: Consider investing in other savings products such as unit trusts and/or a tax-free investment account. These have numerous benefits that will grow over time and complement the money you’re investing in a retirement annuity.
There are numerous types of unit trusts to invest in; they include conservative, moderate and aggressive funds. Your choice depends on your risk appetite. Speak to investment management professionals before making any decisions.
Tax-free investment account
You’re currently allowed to invest R36,000 per tax year and R500,000 over your lifetime. It’s important to remember to stick to the limits. A hefty penalty of 40% is imposed on any contribution that may exceed these set limits.