How to get your retirement savings back on track

Eight out of ten South Africans plan to continue working beyond retirement age, largely due to lack of savings, as indicated by the results of the inaugural FNB Retirement Insights Survey. This coincides with commonly-held estimates that only 6% to 10% of South Africans have adequate retirement income.

It isn’t easy to find extra money for retirement savings when coping with the rising cost of living, and interest rate increases. However, by adopting some key strategies, you can save consistently, and get your retirement savings back on track. 

Tip: If you’re not a pension- or provident fund member, consider investing in a retirement annuity today.

Why are retirement savings important?

Retirement savings are often seen as a grudge spend, especially when we feel those future savings could help us to get by today.

However, failing to save will result in one of four problematic outcomes, says Wynand Gouws, wealth manager at Gradidge Mahura Investments. These include applying for a meagre government pension, living on a lot less, working for a lot longer, or depending on your family for financial support - which may compromise your relationships and independence. 

Getting back on track

Understand your needs

The first step to getting your retirement savings back on track is to work on a retirement plan with a financial adviser (FA).

Your FA will help you to understand your retirement needs, how much it will cost to meet them, and what you’ll need to save monthly to get there.

“It’s one thing to have a retirement fund and contribute a nominal amount to it, but it’s another to know how much you should be contributing each month to reach your retirement objectives,” says Cherise Erasmus, a certified financial planner at Crue Invest.

“When you sit down with a budget, remove expenses that cease on retirement, such as education and home loan payments, and add new expenses, such as medical costs. These are often paid from your income, and it’s easy to forget to factor them in,” Gouws says.

The next step is to perform a “matchbox calculation” to determine the capital amount you will require to provide for your needs. 

“For example, if you need R50,000 a month in retirement, in today’s terms, your annual income requirement will be R600,000. If you divide this by 5% (an industry figure, based on a 20-year retirement period) the amount you’ll need is R12 million.”

Gouws says most people underestimate how much capital they’ll need to provide an adequate income in retirement. For this reason, it’s essential to draw up a retirement plan, considering what you’d like to be able to do during your retirement years.

“If you’re not living within your means, and this is affecting your capacity to save, you have one of two choices,” says Erasmus. “Either downgrade your lifestyle or find ways to increase your income.”

Invest in tax-efficient products

Make sure you’re investing in tax-efficient products that maximise your savings, says Gouws. You can claim up to 27.5% or R350,000 of your earnings as a tax deduction annually, when the funds are invested in a retirement annuity.

“The money saved towards your pension is deducted from your taxable income and reduces your tax. Your money also grows tax-free in this investment,” he explains.

“A tax-free savings account is also a good idea, as your returns can provide a tax-free income during retirement. You can contribute up to R36,000 a year to these investments.”

Erasmus says different products have different levels of flexibility and tax benefits. “A combination of them, based on your specific circumstances, can provide you with an income in an efficient manner,” Erasmus concludes.

Tip: Did you know you can beat inflation with a tax-free savings account (TFSA)? Open a TFSA today.