Stephan Joubert When to start planning for Retirement Yesterday 3Okt2024

When to start planning for Retirement? Yesterday!

 

By Stephan Joubert CFP®

 

For some, retirement planning can be regarded as the financial equivalent of following a healthy diet. We know how important it is, but it is easy to move it out to another day. We see this happen often. So, when is the ideal time to start planning for your retirement? The short answer: yesterday! The next best time? Today. Let us look at why starting early is crucial and what you can do if you join the party a bit late.

 

The Early Bird Gets the Compound Interest

Starting your retirement planning early is like planting a tree. The sooner you plant it, the more time it has to grow. The key component here is compound interest, which Albert Einstein called the “eighth wonder of the world.” When you start saving in your 20s or 30s, your money has decades to grow and multiply. Even small contributions can turn into a substantial nest egg over time.

To illustrate this: if you start saving R 1,000 a month at age 25, assuming a modest 5% annual return then you have saved R1,526,000 by the time you reach 65. If you wait until you are 45 then you will need to save approximately R3,713 per month to reach the same amount by age 65. The earlier you start, the less strain you place on your cashflow to reach your retirement goals.

 

Retirement planning can be broadly segmented into the following phases:

20s to 30s: Your foundation years

    • Start Early: If your employer does not provide you with a retirement savings vehicle (pension or provident fund), start a Retirement Annuity (personal pension). This savings vehicle is available from various service providers (insurers and investment platforms).

    • Match your employer’s contributions: If your employer contributes towards your retirement, contribute enough to enjoy the full benefit granted by SARS. SARS provides taxpayers with an annual deduction on retirement fund contributions of the lesser of 27.50% of your remuneration/ taxable income or R350,000.

    • Increase Contributions: As your income grows, increase your contributions keeping in mind the tax benefits granted by SARS.

 

40s to 50s: The growth years

    • Maximize Contributions: Aim to make full use your annual retirement contribution benefit granted by SARS. It is important to bear in mind that you are saving with “pre-tax” money i.e. your contributions are deducted before calculating your tax payable on your remuneration.

    • Diversify Investments: Ensure your portfolio is diversified to balance risk and return. Your retirement savings is subject to limitations imposed by Regulation 28 of the Pension Funds Act. These limitations prevent excessive concentration risk by prescribing how much you may invest in the different asset classes.

 

60s and Beyond: The Preservation Years

    • Consider a blend of conservative and growth assets: While there is no silver bullet to ensure the best outcome for your retirement savings, one can consider making use of a blend of asset classes to provide you with capital protection while also providing for capital growth during your retirement.

    • Plan your withdrawals: Develop a strategy for withdrawing your funds in a tax-efficient manner. You can withdraw between 2.5% - 17.5% from your retirement funds annually and it will be taxed according to your marginal tax rate. Remember that if you have more than one source of funds you need to bear in mind that the tax is calculated on your total taxable earnings.

 

What if I start late?

So, you did not start planning early. Do not panic, it is not too late. Here are some practical steps you can take if you have left it a bit late:

  1. Maximize Contributions: Take full advantage of the tax benefits granted by SARS. Refer to limits stated previously.

  2. Cut Expenses: Trim your budget to free up more money for retirement savings. Every little bit helps.

  3. Delay Retirement: Consider working a few extra years.

  4. Invest Wisely: Consult a Certified Financial Planner to create a tailored investment strategy that balances growth and risk.

  5. Downsize: It is not ideal, but when push comes to shove, consider downsizing your home or moving to a more affordable area to reduce living expenses.

 

Retirement planning is a marathon, not a sprint. The earlier you start, the easier it will be to reach your goal. The success of planning for retirement often does not hinge on the complex details of the investments themselves, but more on when you start saving. For anyone looking to ensure their financial well-being in the future, the advice is straightforward: the best time to start saving for retirement is right now. So, grab your running shoes, make an appointment with your financial advisor, and start planning today!

 

Read more about Ascor® Retirement Planning Services

Ascor® Independent Wealth Managers Retirement Planning Services page

 

Related Topics

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https://ascor.co.za/put-retirement-planning-on-your-2023-to-do-list/

https://ascor.co.za/financial-needs-analysis-for-retirement/

https://ascor.co.za/when-and-how-to-retire/

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