The Biggest Irony of Providing for Retirement

As a financial adviser we have to deal with a few circumstances that just leave us feeling very sad. The most common and obvious one is when death strikes and there needs to be a policy payout. But such an instance is not as sad as facing a person who has reached retirement age and realises that they don’t have the means to have an enjoyable retirement. The expression of pain and confusion is clear for all to see, but that quickly turns to desperation and often self pity. Sadly this is a scenario we see all too often.

The biggest irony of retirement saving is that the people that are best positioned to save for retirement – the young – are the people that are largely not thinking about saving for retirement.

The Biggest Irony of Providing for Retirement As a financial adviser we have to deal with a few circumstances that just leave us feeling very sad. The most common and obvious one

Consider person 30 years old, earning R30 000 per month today. She wants to retire at age 65 and expects to live for 20 years after retirement. She wants to contribute in order to fully provide for her retirement (75 % of final salary). How much will she need to contribute if she starts saving for retirement at age 30, age 35, and age 40?

It requires a third of the money at age 30 than it does at age 40 in order to save for retirement. The main reason for this is a phenomenon known as compounding. Compounding simply means returns on returns. Compounding becomes more effective with TIME. Consider the value of a R100 000 investment over different periods and at different rates of return.

The difference between a 10 % return and an 11 % return is R14 500 over 10 years, and over R500 000 over 30 years! At a return of 14 % per annum the value of the investment doubles every five years. By investing earlier an investor gives their investment a chance to double a few more times. Hence the importance of starting early. 

The reason most South Africans retire with insufficient capital is that they cash in their pensions when they change jobs, thereby destroying the power of compounding. As a result they find themselves in a position where they have to start from scratch, and therefore have to contribute three times as much than if they simply remained invested.

Government has made retirement annuities (RAs) and other retirement vehicles an extremely attractive investment option. They are effectively tax havens because there are no taxes on returns or on the realisation of Capital Gain events. Contributions to a RA are also tax deductible up to a point, meaning that the investor can reduce their tax liability while saving for their old age. The best advice is to contact a professional financial adviser and go through a retirement planning process to get to grips with the numbers involved.