The sad fact is, however, that less than 10% of South Africans retire financially independent and are able to maintain their lifestyle once they stop working.

Planning for your retirement is an essential part of your holistic financial plan, and you need to set concrete and realistic goals in order to ensure a successful outcome. As part of sound retirement planning, it is necessary to take a short-, medium- and long-term view when making investment decisions. Traditional thinking about a company’s pension fund being the sole retirement provider has become obsolete in the face of inflationary pressures.

How much is enough?

People live longer than in the past and require more money to ensure financial independence until death — another reason why you need to supplement your pension scheme contributions with private investments. How much is enough for retirement? Most experts agree that the number is between 70% and 80% of your current income. According to Peter Doyle, former president of the Actuarial Society of South Africa, actuarial models show that a good rule of thumb is that 12 times your annual salary is likely to buy you a financially comfortable retirement.

Financial advisers, savers and retirees have traditionally relied on the 4% rule in their planning for retirement. The rule was first proposed by Californian financial planner, William Bengen, in the 1990s. In simple terms, the rule states that if retirees withdraw 4% of their savings annually (adjusting this amount for inflation every year thereafter), their savings will last a minimum of 30 years. The rule requires retirement savings to be split equally between shares and bonds. Critics of the 4% rule’s relevance says that it fails to consider issues such as taxation or varying investment horizons and point out that financial conditions when the rule was formulated were very different to the current reality.

What are your options?

People who approach retirement tend to become too conservative with their investment portfolio, often resulting in their returns not keeping up with inflation. The best investment strategies are based on the timing of investments, the rate of growth, and the capital amounts invested. In order not to be overly conservative and to provide for changing times ahead, an investor should consider a choice of buying a living rather than a conventional annuity. A conventional annuity yields lower returns and possibly affords greater security because the returns are guaranteed, a living annuity, on the other hand, offers more flexibility, but requires greater self-discipline on the part of the investor.

Retirement savings options typically consist of company pension schemes, retirement annuities (RAs), unit trusts and money market investments, as well as so-called pension preservation funds for people who move between jobs. Retirement annuities are excellent long-term investments that, by law, cannot be ceded as securities on loans at financial institutions, in order to protect the investor. Alternative ways of saving for retirement, once you contribute your allowable 27,5% of your gross remuneration (limited to R350 000) to a pension fund or RA, include investing in tax free savings accounts, a second property, investing in shares, or collecting valuable works of art.

Keys to successful retirement planning include the following:

• When changing jobs, do not cash out your retirement savings.
• Do not use your retirement savings to pay off debt or finance your living expenses.
• Do not take the one-third cash lump sum on retirement; rather use the capital to increase your monthly pension.
• Calculate the percentage of your monthly salary you need to save to reach your retirement goal with the assistance of a certified financial planner, and set up a monthly debit order for your savings.
• Utilise any additional funds received, such as an annual bonus, to increase your retirement savings.
• Ensure that your investment portfolio is structured in such a manner that the returns received will beat inflation.
• Re-evaluate your financial plan at least once a year in consultation with a certified financial planner.

In an interview with the New York Times, Bengen offer the following advice to those saving for retirement: “Go and sit down with a qualified adviser. You are planning for a long period of time. If you make an error early in the process, you may not recover.”

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.