Retirement calls for a well-calculated planning strategy
The fear of running out of money in retirement is common among retirees and people who are near the end of their working life.
It is a valid concern. According to the Sanlam Benchmark Survey, only 6% of South Africans will be financially independent when they retire. For the remaining 94% to be equally prepared, planning is important to achieve the simple goal of having enough retirement savings to last them throughout their retirement years.
Over the years, we have met many clients who complain about unsuitable retirement planning advice. When a client complains, it is usually for a good reason or out of genuine concern.
They usually received inappropriate retirement planning advice that did not meet their expectations or were sold an inappropriate product or maybe a combination of the two.
The challenge is that many retirees need money for emergencies or an extra income but are unable to access their retirement savings post-retirement. This is because you cannot change the terms of your transaction after implementing a post-retirement product. You need to think carefully about your choices and the implications of your decision before you retire.
Mr Khumalo is 64 years old; he plans to retire from the Department of Health next year. His pension fund is currently worth R3-million and he also has personal savings of R50000.
When he retires from a pension fund next year, he will be allowed to take one-third of his retirement capital in cash.
With the rest of the money, he must buy an annuity. Annuities are a type of investment account used to generate regular income payments in retirement.
He has decided to buy a living annuity because he wants flexibility to review and change his income payments every year.
Making sense of his tax situation
The first R500000 of his one-third retirement benefit is taxed at 0%. The balance of his retirement benefit is taxed according to the retirement tax table.
His contributions made to the Government Employees Pension Fund before March 1 1998 are tax-free and will increase his tax-free lump sum benefit.
It is important to remember that the government does not just take tax, it also gives him a number of generous allowances for saving tax.
He can take advantage of these allowances with tax planning.
Running out of money
Mr Khumalo retires and takes a tax-free lump sum of R500000 and transfers the balance, R2.5-million, into a living annuity. He draws an income of 5% a year, which is R10416 a month (R2.5-million x 5%/12). He then uses his tax-free lump sum of R500000 to renovate his house, to pay off debt and to buy a new car. A year later, he needs money to pay for his daughter's university registration; however, his monthly income is not enough. This story is all too familiar to most people who retired without the assistance of a qualified financial adviser.
Planning is important
The primary objective in post-retirement planning is the provision of sufficient income and capital for unforseen expenses.