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How to plan for retirement

Retiring planning is one of the things that most people don’t consider during their lifetime. Because most people don’t plan for their retirement on time or at all, they have often found themselves depending on others at retirement or working extra jobs to supplement their current income to cover their expenses. Life at retirement can be though if one is not prepared. This is because at retirement most financial institutions are not willing to extend credit to individuals especially when they are above 65 of age as they are considered risky and have a short lifespan. Also, after the age of 60, individuals are more pruned to illnesses which increases their cost of living.

Before diving into answering the question of how to plan for retirement, it is important that we first highlight the benefits of planning for your retirement. Although it is essential to start planning for your retirement early, it is never too late to start planning today.

Benefits of planning for your retirement early:

  1. Experience the power of compounding earnings. Compounding earnings is earnings earned on earnings. However, only those that start planning early can experience the true power of compounding earnings. Let us consider the following two examples:
    • A is 30 years today and decides to start saving for is retirement. He decides to put a lump sum of R10000 today and to keep contributing R1500 per month in addition to the R10000 towards his retirement. For this purpose, let us assume that Mr. A put his Money in an investment that guarantee’s him 8% interest per year compounded and also let us assume that he would retire at 65 thus has 35 years to retirement. At the age of 65, Mr. A would be able to retire comfortably with R3,603,749.
    • Let assume that Mr. B is 45 today and would retire at 65. Thus, he has 20 years before he retires. Let us also assume that he makes the same contributions as Mr. A and earns the same interest rates. At the age of 65, Mr. B would be able to retire with R932,798.

 

Have you seen the difference between Mr. A and B? that is the power of compounding and the benefit to start planning for your retirement early. If Mr. B wants to retire with R3,603,749 like Mr. A, he would have to be contributing R6034.56 which is R4534.56 more than what Mr. A is contributing. Therefore, waiting to start planning for your retirement late might be cost or burden you more.

 

  1. Save for Rainy days. Planning for your retirement provides you with peace of mind against raining days.
  2. Support your dependents. We have seen situations where a person is the breadwinner of the family and when he dies or loses his job, his whole family or dependents suffer and can’t afford the basics of life such as education or food. By planning for your retirement, you can leave your life smiling every day knowing that your dependents would never lack.
  3. Tax Benefits. Did you know that your Retirement annuity contributions are tax-deductible? For example, if you earn R400,000 per year and contribute R160,000 towards your retirement per year, you would only be taxed on R240,000 (R400,000-R160,000) saving you some tax money. Isn’t this awesome. However, keep in mind that there is a limit to the amount that can be deducted. The limit is 27.5% of your remuneration or taxable income limited to R350,000 per year.
  4. Retire early. Whoever said retiring at the age of 65 should be the norm? Let me shock you, if you start planning for your retirement early, you can comfortably retire at the age of 55 and travel the world.

Now that we have investigated the benefits of retirement planning, let us consider how to start planning for it today. Below are the steps you need to follow

  1. Assess your current situation by identifying how much you have saved aside as well as your current financial challenges and opportunities
  2. Identify what your sources of income are.
  3. Decide at which age you would like to retire
  4. Decide on how much you would need at retirement to compliment your lifestyle and visions
  5. Consider your risk tolerance. For example, would you like to invest your money in shares, Exchange-traded funds, Unit trust, or property
  6. Consult with a financial advisor or planner
  7. Start saving, keep saving and make sure to stick to your goals

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