When and how to retire

Determining how much is enough for retirement involves careful planning, realistic goal-setting, and regular review.

 

By Wouter Fourie (CFP®)
Director of Ascor® Independent Wealth Management.

Wouter Fourie is Past winner of the FPI Financial Planner of the Year competition and the co-author of The Ultimate Guide to Retirement in South Africa and, Secure your retirement.

 

For many, determining the right time and amount needed for retirement can be daunting, especially given the current global and local economic uncertainties.

The Covid-19 pandemic, geopolitical tensions like the Russian invasion of Ukraine, and rampant corruption in South Africa have all contributed to inflation and volatile investment markets. Despite these challenges, many retirees can still achieve financial security with proper planning.

This article will guide you on how to assess whether you have enough for retirement, drawing insights from The Ultimate Guide to Retirement in South Africa by Bruce Cameron and Wouter Fourie, and considering the upcoming two-pot retirement system.

 

The stark reality

In South Africa, approximately 15 million pensioners rely on occupational or commercial retirement funds amounting to R3.2 billion. Shockingly, less than 6% of these retirees are financially secure. The critical questions you need to address include:

• Have I saved enough?

• What if I live to 100?

• What if my partner or I become ill?

• Can I afford to retire?

 

Key questions to consider

Lifestyle maintenance

• Current lifestyle: Can you maintain your current lifestyle and fulfil your retirement dreams?

• Debt: Have you paid off all your debts?

• Medical bills: Do you have enough to cover medical expenses, which often increase faster than inflation?

If you can answer “yes” to all these questions, you are likely ready to retire financially. However, statistics suggest that fewer than 10% of South Africans can do so, with the true figure being closer to 5-6%.

 

Replacement ratio

The replacement ratio is a crucial measure in retirement planning, representing the percentage of your final salary that you receive as an initial pension. For example, if your pre-retirement salary is R300 000 annually and your pension is R180 000, your replacement ratio is 60%. Most employer-sponsored retirement funds target a replacement ratio of 60-75% after 40 years of contributions.

 

Is this enough?

The industry assumes that retirees need less money because they no longer save for retirement, enjoy greater tax relief, have paid off debts, and incur fewer work-related expenses. However, this assumption may not hold for everyone. The gap between your retirement needs and the pension you receive is known as the “retirement gap”.

 

Bridging the retirement gap

If there is a gap between what you need and what you receive, consider these strategies:

• Increase savings: Maximise your retirement savings now.

• Postpone retirement: Delay retirement to increase savings and investment growth.

• Post-retirement job: Consider working part-time during retirement.

 

Targeting retirement income

Your retirement income should meet two levels:

• Wants: A realistic best-scenario income that supports your desired lifestyle.

• Needs: A basic minimum income to cover essential expenses.

 

The two-pot retirement system

A significant change in South African retirement planning is the introduction of the two-pot retirement system, effective from September 1, 2024. This system aims to balance immediate financial needs with long-term savings:

• Vested component: Savings accumulated before the system’s start remain untouched.

• Savings component: One third of contributions can be withdrawn for emergencies, taxed at your marginal rate.

• Retirement component: Two thirds of contributions are preserved for retirement, ensuring long-term financial security​.

 

Implications of the two-pot system

This system provides flexibility but requires careful management to avoid depleting retirement funds prematurely. It emphasises the importance of disciplined saving and strategic withdrawals only in genuine emergencies.

 

Assessing your retirement needs

Calculating how much money you need in retirement is complex due to factors like investment returns, inflation, and health. For example, the table below illustrates how changes in inflation and interest rates affect the monthly pension (level annuity) purchased with R1 million by a male turning 60:

Year	Average CPI	10-year bonds	Monthly Pension
2007	7.1%	8.36%	R8 921
2008	11.0%	7.49%	R7 868
2009	7.2%	9.52%	R9 125
2010	4.3%	8.50%	R8 911
2011	5.0%	8.37%	R9 217
2012	5.7%	6.99%	R8 451
2013	6.0%	8.40%	R8 993
2014	6.1%	8.19%	R8 982
2015	4.6%	10.06%	R9 739
2016	6.3%	9.31%	R9 313
2017	5.3%	9.39%	R9 595
2018	4.6%	9.83%	R9 492
2019	4.1%	9.63%	R9 719
2020	3.3%	10.26%	R10 126
2021	4.5%	10.73%	R10 088
2022	6.9%	11.93%	R10 633
2023	7.0%	12.00%	R10 700

Factors influencing retirement lifestyle

Location

Where you choose to live can significantly affect your retirement expenses. Living in an expensive area like Cape Town’s Atlantic Seaboard will require more funds than a more affordable location like Loxton in the Karoo.

 

Supporting family

Many retirees find themselves supporting children and grandchildren. This additional burden can strain retirement savings.

 

Healthcare

Decide between a hospital plan and a comprehensive plan. Hospital plans may cost less but can result in higher out-of-pocket expenses for non-hospital treatments.

 

Food and travel

Eating out frequently and travelling extensively require higher budgets. Conversely, cooking at home and limiting travel can reduce expenses.

 

Transportation

Owning a car can be expensive. Consider using public transport or services like Uber to save money.

 

Lifestyle choices

From banking to leisure activities, numerous factors influence your retirement expenses. Utilise pensioner discounts and make cost-effective choices to stretch your budget.

 

Preparing for the unexpected

Retirement planning must also consider unexpected expenses and events, such as:

• Bequests: Planning to leave money for heirs affects your spending.

• Longevity: Longer life expectancy increases the amount needed.

• Accumulated wealth: The more wealth you have accumulated, the more comfortable your retirement will be.

• Dependants: Financial support for dependants can deplete your savings.

• Debt: Entering retirement debt-free is crucial.

• Tax: Estate duty and capital gains tax can reduce the amount available to your heirs.

• Investment returns and inflation: Poor returns and high inflation can erode your savings.

 

Partnering with a certified financial planner (CFP)

Importance of professional guidance

Working with a CFP provides invaluable insights into retirement planning, helping you navigate complexities and make informed decisions. They can assist with:

• Tax implications: Understanding how much of your withdrawal will be taxed and at what rate.

• Retirement income sustainability: Ensuring your funds support long-term financial stability.

• Alternative strategies: Exploring other investments and sources of income.

• Long-term planning: Assessing the long-term effects of your decisions and adjusting your plan as needed.​

 

Conclusion

Determining how much is enough for retirement involves careful planning, realistic goal-setting, and regular review. The introduction of the two-pot retirement system offers new flexibility, but it also demands prudent financial management. By understanding your needs and using available tools, you can create a robust plan that ensures a comfortable and secure retirement. For more detailed guidance and personalised advice, consider consulting a CFP.

 

My best-seller book, The Ultimate Guide to Retirement in South Africa, co-authored with award-winning editor Bruce Cameron, provides readers with comprehensive information on retirement planning in South Africa. For more information about the book visit www.retirementplanning.co.za 

 

This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/when-and-how-to-retire/

 

Read more about Ascor® Retirement Planning Services

 

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