How can I save for retirement and beyond? YOUR QUESTIONS ANSWERED

THIS FEATURE IS SPONSORED BY PSG WEALTH Send your financial queries to personalfinance@inl.co.za

I read somewhere that South Africans’ life expectancy is on an upward trend and that people are expected to live longer. What should we be considering in terms of saving more towards retirement in order to mitigate outliving one’s savings, and what if you don’t currently have the extra means to be saving more?

Name withheld

Pierre De Bruyn, Wealth Manager at PSG Wealth, Northcliff, responds: Since 1978 we have been guided by the 15% rule; a rule which suggests that, if you start in your twenties and save 15% of your income, you should retire comfortably. If it’s that simple, why aren’t we retiring comfortably?on average, men work only 3 years longer now than they did in 1978 but live 12 years more! (Source: Our World in Data www.ourworldindata.org) This means that the 15% rule hasn’t been appropriate for some time, and for women, who outlive men by 6 years, the 15% rule has never been on-target.

Given increased life expectancies, a 20% rule would be more appropriate. But if you start saving later in life, and as life expectancies increase (expected to be 81 for men and 86 for women by 2050), this percentage should also increase.

If, however, you can’t afford to save more, you can reduce the risk of outliving your savings by doing the following:

● Increase investment returns – Investing for 30 years in a moderate portfolio with an average return of 9% instead of a conservative one with an average return of 7%, can result in additional capital at retirement of 36% (Based on recurring contributions which increase by 5% annually).

● Higher returns generally imply higher risk. Consult your adviser before pursuing this strategy.

● Reduce investment fees – A reduction of only 0.5% can result in 11% more capital after 40 years.

● Be tax-savvy – Tax can reduce your returns by as much as 45%, depending on your tax rate. More tax-efficient investments result in more capital at retirement.

● Retire later – if you retire at 65 instead of 62, you have 3 years more to save and 3 years less to provide for.

● Consult a reputable financial planner to ensure you meet your retirement goals.

Is there a flexible tax-free account?

I am looking for a financial product, like a tax-free savings account, to supplement my long-term savings while offering me some sort of flexibility. Are there any other options available that can best cater to my needs, or would you recommend a TSFA?

Name withheld

Magdeleen Cornelissen, Wealth advisor at PSG Wealth, Menlyn, responds: In my opinion, a tax-free investment plan is indeed an appropriate product to consider, especially if you want to supplement your existing long-term financial products. You can make flexible contributions up to a maximum of R36 000 per year and R500 000 over your lifetime. As all dividends, interest and growth received are tax-free, and you can expect a better outcome compared to a unit trust investment that was constructed in the same way as your tax-free investment plan.

You are also able to make withdrawals from your investment, but it is important to remember that the annual contribution limits will not increase if you make withdrawals from this product. There are tax-free investment plans available in the market that allows for the nomination of beneficiaries. This is a wonderful estate planning benefit, especially as your tax-free investment becomes higher in value over time. It is important not to exceed the contribution limits. You will pay a tax penalty of 40% of the amount you invest above the maximum limits. If you want to contribute more than R36 000 per tax year, you can consider investing any additional contributions into a unit trust portfolio. This product also offers flexibility with regard to contributions, as well as withdrawals. One should, however, consider the impact of tax on dividends, interest and growth achieved.

Both products offer flexibility in the construction of the investment. This ensures that the needs of investors can be addressed, regardless of their risk appetite.

When is the best time for an early retirement?

I’ve just turned 45, and I’ve been saving towards my retirement for 23 years. I am considering early retirement as I have no debt and have a home that is paid off and my monthly living costs are very low. What will be the market value of my pension fund when I’m 55 years old, and how can I know when it’s the right time, financially, to retire?

Name withheld

Malan Vermaak, Employee Benefits, PSG Wealth, Midlands, responds: Congratulations on beating the prevailing statistics for South Africa, you truly are a diligent saver! To retire at the age of 55 is very young nowadays, and we increasingly see companies pushing the retirement age out as far as 70 to accommodate this. Living much longer will mean that you will more than likely draw from your savings for a much longer period, so your planning needs to take that into account. However, saving for 10 years longer can increase your replacement ratio by up to 25%.

The question we should all ask is therefore not, “at what age I should retire?”, but rather, “at what level of income do I want to retire?”. In order to retire comfortably, retirees generally need to target a replacement ratio of 75%. Simply put, this means that you are able to fund 75% of your final salary from your accumulated savings, with enough capital to also increase the withdrawal (annually) by inflation.

As a rule of thumb, drawing 4% of your savings should give you the protection mentioned above for at least 30 years. Every R1 million saved will therefore give you an inflationary protected R3 333 per month for 30 years.

Given the many factors to consider, I strongly suggest you see a registered financial planner to prepare a holistic financial plan that includes all of your financial needs, assets and (limited!) liabilities.

Does hybrid work affect insurance policies?

The company I work for has instituted a permanent hybrid working system, which sees me working from home three days a week. Now that this has been formalised, I wanted to find out how this affects my insurance cover and the policies I have in place. Can you provide some clarity on this matter?

Name withheld

Karen Rimmer, Head: Distribution at PSG Insure, responds: In terms of the equipment you use at home, which belongs to your employer, such as laptops, mobile phones or printers, your employer will be responsible for the insurance cover on these items. It is, however, advisable that you check whether the equipment you use is adequately insured by your employer and whether there are any workplace policies that relate to how the equipment should be safeguarded in transit or stored in your home.

It is also the responsibility of your employer to ensure their insurer is notified of any changes to the risk address if employees are making use of any company assets, such as printers or desks to work from home with.

If, however, you are using your own, personal equipment for work purposes, these items can be insured as part of your home or all risk policy, but it is best to speak to your insurance adviser to discuss the options that are available to you.