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What you should know about

Retirement planning in South Africa

If you are approaching retirement or are currently planning your income needs for retirement,
it is important to be informed about the overall retirement landscape in South Africa.

Preparing financially for retirement can be daunting, but having an understanding of the common pitfalls associated with retirement income planning is a good place to start. A retirement income strategy becomes simpler once you are familiar with how to protect your retirement capital from these common pitfalls.

Let’s dive straight in.

Maximise retirement savings contributions

It's never too late to start saving for retirement. But it goes without saying that the most effective way to set yourself up for a financially prosperous later life is to save for retirement early.

The key advantage of saving early is the power of compounding capital growth over time. By initiating contributions to your savings fund as early as possible, you give your investments more time to grow.

As interest or returns earned on savings are reinvested, they, in turn, generate more returns. This compounding effect can lead to substantial growth, potentially multiplying your initial contributions.

If you don’t already have any retirement savings, either through an employment benefit or a self-managed investment, then we recommend you first invest some time in evaluating the options available.

Use tax-efficient retirement savings vehicles

Choosing a tax-efficient option whereby you can optimise your savings increases the overall value of your retirement savings.

Popular savings options include retirement annuities, tax-free savings accounts, pension and provident funds. By investing through these channels you can take advantage of tax-efficient capital growth, depending on the specific vehicle chosen.

This vehicle uses monthly deductions from your salary and, therefore, is only available to persons working for employers who offer a dedicated pension benefit. Generally, the drawback of pension or provident funds is that they offer little flexibility in terms of investment options.

If you leave your company before retiring, you can transfer your funds to your new company’s pension fund or move it to a preservation fund – however, limited investment accessibility may still apply.

If you change jobs, it is important to ensure that your retirement capital is well preserved. You may want to withdraw a full lump sum early on, but premature withdrawals can have severe long-term implications.

Preservation funds are specifically designed for these cases – by transferring a lump sum payment into a preservation fund, your retirement capital will continue to grow. You are able to retire from a preservation fund at 55, before which you are able to make one partial or full withdrawal.

If you are self employed, or if your employer does not provide a pension or provident fund (and even if they do), you can invest independently in a retirement annuity which serves as an alternative vehicle for retirement savings.

This option gives you more choice over your retirement annuity provider, fund manager, and investment options – within the limits set out by fund regulations, of course.

What are my options if I’ve started saving for retirement too late?

While prevention is always better than cure, there are strategies you can employ if you need to start playing catch up on your retirement savings plan.

Here are some options:

1. Increase savings rate

The easiest way to catch up on savings is to save more. You can aim to save at least a quarter of net income, if possible.

Consider setting up a debit order into a suitable savings vehicle to ensure consistent contributions. Additionally, look for opportunities to cut back on unnecessary expenses, and redirect those funds towards your savings.

2. Make more aggressive investments

A more aggressive investment approach may be necessary to catch up on your retirement savings goals. In this case, the ‘100 minus age’ rule is a straightforward way to help you figure out how to invest your money wisely – here’s how it works:

  1. Take your current age and subtract it from 100. For example, if you are 65 years old, 100 minus 65 equals 35.
  2. The number you get (in this case, 35) represents the percentage of savings that you should put into riskier investments, such as equities. These investments have the potential for higher returns but also come with higher risks.
  3. The remaining percentage (in this case, 65) is what you can put into safer investments like bonds or cash. These may not provide as much return, but they are less likely to depreciate and, therefore, serve as a safety net.

Overall, this approach results in a smaller percentage of your portfolio being invested in equities, which historically have offered higher returns over the long term, while a higher portion of your retirement savings accrues value slower in safer investments.

3. Always avoid cashing out

If you have existing savings, avoid cashing them out prematurely. As we’ve explained, the consequences of cashing out early include thwarted compound growth, and moderate to severe tax implications.

4. Consider working longer

It may not be ideal, but extending your working years or engaging in informal employment (like a side hustle) can give you more time to save. In South Africa, it is becoming far more common for people to work past the traditional retirement age, either full time or part time, to bolster their savings.

Key takeaway

Whether you are a young professional looking ahead, or you are approaching retirement, or you are actively planning your retirement income, there are many actions you can take to achieve a comfortable experience during later years.

Remember – a proactive, planned approach to saving is the primary building block for a comfortable later life. A professional financial adviser can help guide you through some of these necessary steps more effectively.

Longevity planning and mitigating longevity risk

Increasing life expectancy rates have significant implications for retirees – these days, it is generally not enough to assume that you will live for a certain time period. Making preparations for an extended later life is an essential component of your retirement income plan.

Managing the potential of living longer than you expect  – commonly called longevity risk – generally involves two primary options: investments and/or insurance.

On the investment side, optimising asset allocation, diversification, adjusting the level of risk in your portfolio and managing drawdown levels are some strategies to ensure sufficient funds for a more extended retirement.

On the insurance front, financial products such as life annuities play a critical role in managing longevity risk. Annuities offer guaranteed income streams for life, regardless of how long you live, providing a safety net against longevity risk.

Combining both investment and insurance strategies can offer a comprehensive solution to longevity risk. To ensure income sustainability throughout later years, employ a strategy focused on investment and capital preservation in your retirement income planning.

It is crucial that this plan also accounts for your individual risk tolerance.

Do you need more information?

Consider seeking advice from a qualified financial adviser. Contact us to request the details of an adviser in your area, or to find out more about our offering.

Assess your risk tolerance and investment strategy

If you have managed to set up and execute an effective savings plan by the time you reach retirement age, you will have to think about ways to invest your capital for your maximum financial benefit.

Generally, the bucket approach is a great way to start to flesh out your investment plan – here’s how it works:

The bucket approach

The bucket approach involves dividing savings into different ‘buckets’, where each bucket serves a specific purpose based on an individual's time horizon and financial goals for retirement.

1. The safe and liquid bucket

This bucket is designed to meet immediate cash needs for day-to-day expenses and emergencies. Consider allocating a portion of your retirement capital into traditionally safe and easily accessible investment vehicles like cash, money market funds, or short-term bonds.

These assets provide stability and liquidity, ensuring that your essential expenses can be covered without relying on riskier investments.

2. The moderate bucket

This bucket is for medium-term needs that may arise within the next three to seven years. The main goal of this bucket is to preserve capital that can still be accessed if needed.

Investments here may include a mix of conservative assets like balanced funds or conservative equities, which can offer some growth potential while still maintaining a degree of safety.

3. The long-term growth and legacy planning bucket

This bucket should focus on generating long-term financial security – investments here should achieve future goals through capital appreciation as well as preservation.

Consider investing in growth-oriented assets, such as equities and diversified funds, with a longer investment horizon.

These assets have the potential for higher returns over time, but they also come with higher risk as growth is generally dependent on market performance. While capital appreciation may be a valuable component of your investment strategy, you also may need to consider capital preservation.


Living annuity vs. life annuity: what is the difference?

When you reach retirement age, you must use at least two-thirds of your retirement capital to invest in a living annuity or to purchase a life annuity – these are examples of financial vehicles in the ‘long-term growth and legacy planning’ bucket.

Purchasing a living annuity for legacy planning

Living annuities are often a preferred choice because they offer the flexibility to manage your own investments, and you determine the level of income you can withdraw annually. These vehicles also give your retirement capital the potential to appreciate over time.

A downside of living annuities is that this flexibility could result in you drawing down at unsustainable rates, exposing you to longevity risk.

It is important to note that living annuities leverage risk to generate potential capital appreciation, so they are generally riskier investments.

Purchasing a life annuity for legacy planning

While living annuities leverage risk to generate potential capital appreciation, life annuities eliminate this risk because an initial lump sum payment is exchanged for a steady income for life, no matter how long you live.

If you want to offset the risk to your retirement capital by replacing it with security, life annuities offer peace of mind and protection against the possibility of exhausted savings.

Choosing between a living or life annuity depends on your individual preference, risk tolerance, and goals for your later life.

DEEP DIVE THIS TOPIC: Living vs. life annuity – key things you should know

Key takeaway

Diversification is a fundamental principle of sound financial planning and investment management.

This approach involves spreading investments across different asset classes, financial products, investments, and savings instruments to reduce your overall risk and enhance your portfolio’s performance.

Generally, the diversification approach requires:

1. Risk reduction
By investing in a variety of assets, the impact of poor performance in one investment is offset by the potentially better performance of others.

2. Flexibility and adaptability
As market dynamics shift, certain assets may outperform or underperform. A diversified portfolio can be adjusted and rebalanced to capitalise on opportunities and maintain an optimal risk-to-reward profile.

3. Growth opportunity
Some of your assets may perform better during certain economic conditions, while others are designed to excel in different market environments. By diversifying, you can benefit from growth potential in multiple areas of the market.

4. Mitigation of asset specific risks
Every investment carries its own unique set of risks. By diversifying, you reduce your exposure to asset-specific risks. Diversification spreads such risks across multiple holdings.

5. Long-term stability
By creating a well-diversified portfolio, you can mitigate the impact of short-term market fluctuations and ensure a more stable income stream during later years.

Consider increasing healthcare costs

Planning for healthcare expenses is a crucial aspect of comprehensive retirement planning. Its importance cannot be overstated, given that medical needs increase as people age.

Regular medical check-ups, prescription medication, and treatments for age-related health conditions need to be financed. Ignoring the potential for these expenses to increase overtime can significantly impact your retirement finances and lead to unexpected financial strain.

For example, the retirement savings allocations that fall under the ‘safe and liquid’ bucket would ideally need to be used to cover these essential expenses.

Remember, the bucket approach is not a static strategy; it requires regular monitoring and adjustments based on changing circumstances, goals, and market conditions. You may want to make an informed decision about how your medical expenses will escalate as you age.

If your medical aid payments are likely to escalate significantly over time, you may need to allocate funds from other buckets to the ‘safe and liquid’ bucket in order to accommodate these increased expenses.

Medical Aid

After retiring, many South Africans face a drop in income, making it challenging to maintain comprehensive medical aid coverage.

Try to avoid late joiner fees

Late joiner fees are really important to consider when looking to join a medical aid scheme after age 35, or if you have been without medical aid cover for an extended period. These fees are designed to discourage you from delaying enrolment in a medical aid scheme and are charged in addition to regular monthly premiums.

The calculation of late joiner fees is based on two factors:

  1. The age of an individual at the time of joining
  2. The length of time an individual has been without medical aid cover

The longer the period without cover and the older the individual, the higher the penalty. In addition, late joiner fees are not a once-off charge; instead, they are added to your monthly premium for as long as you remain a member of your chosen medical aid scheme.

However, there are some exceptions to late joiner fees. If you have been without medical aid cover for less than 90 days or are in the process of moving from one medical aid scheme to another, you may not be required to pay the late joiner fee.

It's essential for you to carefully consider the implications of late joiner fees when choosing a medical aid scheme after retiring. If you are a late joiner, it is best to make sure your income plan allows for the higher fees you'll need to pay.

Long-term care

Long-term care needs should also be a key consideration in retirement planning. As you age, the possibility of requiring long-term care becomes more likely – whether in-home care, assisted living facilities, or nursing homes.

Long-term care can be expensive, and without proper planning, it can deplete retirement savings quickly. This is why, when constructing your retirement plan, you should consider making provisions to cover these big expenses. This may involve purchasing long-term care insurance or setting aside dedicated funds  for long-term care expenses.

Planning ahead can provide peace of mind and alleviate the financial burden on both you and your family in the event of long-term care requirements.

Here is a list of other essential aspects to consider when assessing healthcare costs in retirement:

  1. Waiting periods are standard for all medical aid members, including a general three-month waiting period and a 12-month waiting period for pre-existing conditions.

  2. Consider essential medical aid benefits for retirement, including a good hospital component, comprehensive chronic condition coverage, and specialised radiology benefits.

  3. Affordable comprehensive plans are ideal for retirees over 60.

  4. Lower-cost options for medical aid after retirement include income-based plans and hospital plans.

  5. Gap cover can extend your existing medical aid benefits by covering the gaps between medical aid payouts and private healthcare costs.

  6. Consult a medical aid broker for informed advice and assistance in choosing, or changing to a medical aid plan that suits your needs and budget after retirement.

The ‘two-pot system’: new rules for how much you can cash out

The two-pot retirement system is a new approach to managing retirement savings, set to begin on 1 March 2024. It means that South Africans will have access to one-third of their retirement savings throughout their working years, while two-thirds will only be accessible upon retirement.

The goal is to discourage people from cashing out their retirement savings when they resign, and to prevent workers from resigning solely to access their funds.

There are a few key points to understand about the new two-pot system and its impact on retirement savings:

  1. Starting from March 2024, retirement fund and retirement annuity members will only be allowed to withdraw up to R25,000 of their existing savings before reaching the minimum retirement age.

  2. This withdrawal is referred to as ‘seed capital’ and will be calculated as 10% of the benefit accumulated in the 'vested component' as at 29 February 2024, limited to R25,000, whichever is less.

  3. This legislation is designed to encourage members to only use the withdrawal option as a last resort and to preserve their savings for retirement. This means it's essential for you to carefully consider the implications of accessing your funds before retirement.

In addition, the legislation excludes legacy retirement annuity funds, which are funds entered into before 1 January 2022 that have certain characteristics.

The two-pot system will follow a phased implementation process. The first phase deals with the two-pot retirement system, while the second phase will address allowances for retrenched workers who have no alternative income.

Overall, the two-pot retirement system aims to promote greater retirement savings and discourage early withdrawals – ultimately providing retirees with more financial security during their retirement years.

Understanding the South African pension system

The South African pension and retirement system is a vital aspect of the country's social security framework, providing financial support and security to retirees and older individuals.

The system comprises various components, including workplace pension funds, government social grants, and retirement annuities.

Overall, having a comprehensive understanding of the South African pension system empowers individuals to plan for their retirement and make the most of the benefits available to them, ensuring financial stability and security during their later years.

Take time to understand your pension fund

Many employed individuals contribute to workplace pension funds, which are employer-sponsored retirement savings plans. These funds allow employees to build up savings throughout their working years, and upon retirement, they can access these funds to support their post-retirement lifestyle.

Government social grants

The South African Social Security Agency (SASSA) administers social grants to provide financial assistance to eligible individuals, particularly older persons with limited means. One such grant is the Older Persons Grant, which aims to alleviate poverty among the elderly population.

To qualify for this grant, applicants must be South African citizens 60 years or older and must meet specific income and asset criteria.

Monitoring and reviewing your retirement plan

Regularly reviewing and updating your retirement plan is of utmost importance to ensure its effectiveness in meeting your financial goals and needs. As life circumstances, goals, and market conditions change, your retirement plan must evolve to stay aligned with your current situation. A professional, qualified financial adviser can help you on this journey.

Adjust for changing circumstances, goals, and market conditions

Life is dynamic, and various factors can impact your retirement plan over time. Changes in employment, family situations, health, and economic conditions can all influence your financial outlook.

It's essential to reevaluate your retirement plan periodically (preferably with a financial adviser) to account for these shifts and make necessary adjustments.

Seeking professional guidance

While managing your retirement plan on your own is possible, seeking professional guidance from financial advisers or retirement planning experts can add significant value. These professionals have the knowledge and expertise to assess your current financial situation, analyse your goals, and provide personalised recommendations to optimise your retirement plan.

Investing in a life annuity with Just SA

When it comes to securing a reliable and stable retirement income, investing in a life annuity is a smart choice. With numerous benefits and advantages, a life annuity can provide the financial security and peace of mind you deserve during retirement.

By investing in a life annuity, you can enjoy a monthly income for the rest of your life, eliminating the risk of outliving your money. Whether you choose a level annuity, fixed-escalation annuity, inflation-linked annuity, or an investment-linked annuity, you can tailor your income to your specific needs and financial goals.

For more information on choosing an annuity that suits your needs, read our in-depth guide on the Eight reasons to invest in a life annuity for your retirement fund.

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