At Stringfellow Investment Specialists we’ll help you spend your time planning your retirement, not planning for it.
There’s a reason they call retirement the start of your second life. By then the kids will be old enough to fix their own mistakes and you’ll have the cutest little grandkids that you’re going to spoil rotten. At the same time, school fees will be a thing of the past and that crippling bond will have long since been paid off. It’ll be your time to do all the things you have been putting off your entire life. Why not buy a boat? Or even travel the world?! You’ll have all the time you need and, if you invest wisely now, the resources to make these dreams happen too.
What is a RA (Retirement Annuity)?
Simply speaking, a retirement annuity or RA is an investment product whereby you put aside a sum of money today and then contribute an additional smaller amount of your salary every month to that plan. Over time, and with the right investment strategy, your investment will grow into a much larger amount that can be used to live off of in your retirement.
The amount of money you need to invest and the amount you need to contribute every month depends entirely on your goals. Do you simply want a monthly “salary” from your RA, or do you have grand travel plans that require lump sum payments to help you finance your year-long around-the-world adventure?
Things to consider when planning your RA is your financial goal and the actions you need to take to implement and manage these goals. This involves a number of factors:
- Your expected retirement age (Usually 55 – 65 years);
- Your current age;
- Your current lifestyle costs;
- Your expected retirement lifestyle cost;
- The percentage of your current salary you can afford to start investing now.
When is the best time to start thinking about retirement?
Right now. The sooner the better. The earlier you start investing in your retirement, the less onerous the contributions you will need in order to meet your goals.
As a rough guide, below are the amounts that one would suggest saving in order to meet your retirement goals. As you see, the later you leave things, the more you need to contribute monthly to hit your goals.
- If you have 40 years left to retirement you must save 10% of your income.
- If you have 35 years left to retirement you must save 18% of your income.
- If you have 30 years left to retirement, you must save 22% of your income.
- If you have 25 years left to retirement, you must save 28% of your income.
- If you have 20 years left to retirement, you must save 36% of your income.
All calculations are based on an expected annual salary increase of 7%, with an expected annual growth in the value of savings of 12% and an expected annual inflation rate of 7% with no employer contributions, no additional savings, and no pension payouts/withdrawals until retirement age. These figures are general calculations and are not guaranteed.
On retirement, you can opt to receive a lump sum payment from your retirement annuity equal to a maximum of one-third of the investment amount. The remainder of the two thirds can be paid out as an *annuity payment. This payment is an amount paid to you on a monthly basis, much like your current salary. Note that your retirement benefits will be subject to tax , albeit at reduced tax rates.
There is an enormous benefit from this type of investment in terms of tax. When contributing to an RA you will receive a tax rebate in the form of a deduction, in addition to not being taxed on the growth of your investment. This effectively means that you can invest this amount now, earn interest and capital growth on the untaxed amount during the lifetime of the investment and only pay the tax when you withdraw the funds in the future.
For example, if your retirement dream is to learn to fly and buy a small share in an aeroplane. You’ll need roughly R150,000 for your lessons, flight hours and exams to qualify (Private Pilot’s Licence). A ½ share in a small, second hand 4-seater plane will cost approximately R1,000,000. You will, in effect, need a lump sum payment of R1,150,000 on retirement. In addition, you will need to pay hangarage for your plane, insurance, fuel and an annual R30,000 service. This equates to a R200,000 a year, or R16,500 monthly annuity. As such with 30 years to retirement, with no initial savings, you would need to put away R4,500 per month to reach the capital requirement at retirement. You will then also receive R151,946 per month (which equates to R19,960 per month today) which will be enough to cover the aviation costs. Play around with our handy retirement calculator to help you with your retirement planning and provide you with an estimate on your future retirement savings.
An RA is only one of the many products you can use to save for retirement. Depending on your personal needs, you may want to consider using a more flexible discretionary investment vehicle.
While this may sound daunting at first, it’s certainly achievable and financial experts such as Stringfellow Investment Specialists can help you put together an investment strategy, or a number of other retirement plans today. This will help you finance and realise your dreams by the time you retire at 65.