Imagine yourself at age 70 or 75. You are no longer receiving a salary, but you still need to pay for food, electricity, fuel, medical expenses, and the small pleasures that make life enjoyable.
What would that older version of you think about the financial decisions you are making today?
Retirement planning is often treated as something we do once: choose a retirement fund, decide how much to contribute, and then forget about it. However, life changes, our income changes, prices increase, families grow, and unexpected expenses occur. As with life, our retirement plan should therefore also not be a once-off document. Treat it as a living plan that is reviewed regularly.
When you first started saving towards your retirement, you may have planned to retire at 65, live in your current home and maintain a fairly simple lifestyle. Years later, you may want to retire earlier, move to another province, travel, or provide financial support to family members.
It is easy to plan only for the date on which you will retire without considering how long your retirement may last. Someone who retires at 65 may need their retirement savings to provide an income for another 25 or even 30 years. Your plan must therefore do more than get you to retirement; it must help to support you throughout retirement.
The cost of your retirement lifestyle may also be higher than expected. Inflation gradually reduces the buying power of your money. An amount that appears sufficient today may buy much less by the time you retire, and its buying power may continue to decline throughout your retirement.
A retirement review does not have to be complicated, and it is also not about predicting the future perfectly. At its heart, it is simply about checking whether the plan you made in the past still suits the life you are living now and the retirement you hope to have one day. It is about noticing when your circumstances have changed and making sensible adjustments while you still have time.
During this review, consider the following:
- Have your income and expenses changed?
- Are you contributing enough towards retirement?
- Are your investments still suitable for your age, goals and attitude towards risk?
- Are the fees you pay reasonable?
- Are your beneficiary nominations up to date?
- Have major life events, such as marriage, divorce, the birth of a child, or a job change, affected your plan?
- Do you have enough emergency savings outside your retirement fund?
A regular review helps you to answer three important questions:
- What income will I probably need when I retire?
- How much am I likely to have saved by then?
- Is there a gap between the two amounts?
Discovering a shortfall can be worrying, but it is better to identify it when you still have time to address it, than shortly before retirement. You may be able to increase your contributions, even if by a small amount, adjust your investments, reduce unnecessary expenses, or reconsider your intended retirement date.
The introduction of the two-pot retirement system has made it possible for retirement fund members to access part of their retirement savings before they retire.
One-third of new retirement fund contributions is allocated to a savings component and two-thirds to a retirement component. The retirement component is intended to remain invested until retirement, while the savings component may be accessed before then, subject to certain rules.
A minimum annual withdrawal of R2 000 may generally be made from the savings component once during a tax year. The withdrawal is taxed at your marginal income tax rate, and your retirement fund may also charge an administration fee.
Having access to this money does not mean that it should be treated as extra cash. The word “savings” can create the impression that this is an ordinary savings account that can be used for holidays, school fees, home renovations, or new appliances. It is not. It is money that was set aside to support you when you are no longer earning a salary.
The real cost of a withdrawal is also much greater than the amount taken out.
For example, if R10 000 remained invested for another 20 years and earned an average return of 8% a year, it could grow to approximately R46 600. This is only an illustration and does not take fees, tax, or changing investment returns into account. However, it shows that withdrawing R10 000 today could mean giving up much more than R10 000 in future.
The savings component can be extremely helpful during a genuine financial emergency. However, it should preferably be used only after other realistic options have been considered. Before making a withdrawal, ask yourself whether the expense is essential, whether it can be postponed, and what effect the withdrawal will have on your future retirement income.
It is also important not to regard the opportunity to make one withdrawal per tax year as an invitation to withdraw every year. The fact that money is available does not mean that taking it is a good financial decision.
During your working years, you do not have to make one dramatic decision to secure your retirement. Increasing your contribution slightly, updating your beneficiaries, building a separate emergency fund, or choosing not to withdraw from your savings pot can all move you in the right direction.
Your future self cannot come back and change the decisions you make today. But you can make decisions today that your future self will be grateful for.
World Financial Planning Day
World Financial Planning Day on 7 October highlights the value of financial planning and helping people turn goals into action. Retirement planning is an important part of that process, requiring people to consider not only when they want to retire, but how their financial plan will support them throughout retirement.
This approach is reflected in the programmes offered by Moonstone Business School of Excellence (MBSE). Retirement planning forms part of the curriculum for the Higher Certificate in Wealth Management (NQF 5), Advanced Certificate in Financial Planning (NQF 6) and Postgraduate Diploma in Financial Planning (NQF 8), alongside areas such as tax, investment and retirement planning.
For financial planning professionals looking to develop their skills, MBSE also offers CPD training as part of its ongoing professional development offering.
For more information about MBSE’s range of qualifications, visit www.mbse.ac.za or contact MBSE at help@mbse.ac.za.
Julette Wentzel is a Senior Lecturer in Business, Finance and Corporate Governance at Moonstone Business School of Excellence (MBSE). She has more than 30 years’ experience in business, financial and IT education and training across the corporate, public and private higher education sectors. Her areas of experience include adult education, online learning, and instructional design, with a particular focus on equipping students with the knowledge and skills to achieve their learning and career objectives.
Disclaimer: This article was contributed by MBSE, a sister company of Moonstone Information Refinery. The views expressed are those of the author and are provided for general information purposes only. They should not be regarded as financial planning advice.
