Financial whizzes have a phrase they love to use above all others: compound interest. This is interest that builds up on money you are saving, so that you can reinvest the money again to earn more interest. Setting aside just a small amount of money every month and raising it in line with inflation and salary increases means the amount will grow as you earn on your savings, as well as its interest. This is what you want to do to make sure you’ll have a comfortable retirement. Ideally, you should start putting money aside with your first job, but it’s never too late to start saving for a rainy day.
How Can I Save for My Retirement?
Company pension or provident fund
If you’re lucky, your employer is helping with contributions to your retirement fund. Let’s say 16% of your income goes into a retirement fund – 8% would be paid by your employer. Let this build up until you retire. While a pension fund allows you to claim up to a third of the retirement benefits as a cash lump sum after tax, with the remainder of it paid out as a monthly income, a provident fund doesn’t limit what you can cash in and any remaining money will be put into a life- or living annuity. Retirement annuities (RA) provide a great solution for those who won’t be benefiting from a company pension, and are a very tax-efficient way to save – also, anyone can join them. Pension or provident funds, on the other hand, are often closed groups. These allow you to save up to 15% of your non-retirement-fund income before tax. You can retire from an RA any time after you turn 55 and claim up to one-third of the benefit in cash. The remainder must be invested into a life or living annuity.
Almost a mix of a retirement annuity and life insurance, this savings vehicle gives you the option of cashing out the money when it matures or reinvesting it. In the event of your death, the money will go to your beneficiary.
These offer you an effective way to save by pooling your money to be invested in the stock market and other asset classes. Shop around for a trust that suits you and invest as much as you want.
What is the Importance?
It is estimated that 9% of people live 35 years beyond retirement and 51% live 20 years beyond 65. That is a long time to keep funding yourself, though only six in 100 South Africans save enough for retirement.
Make an appointment with a financial adviser who can offer you solid financial advice in how to setup your savings plan. To find a certified financial planner, log on to the Financial Planning Institute’s website: fpi.co.za
Words: Lisa Templeton | Photography