Essential tips on how to fund your retirement income

Any successful retirement strategy needs to include a debt repayment plan

Image: 123RF

According to the national Treasury, only 6% of South Africans can afford to retire comfortably – and this figure has been the same for the past 25 years.

The reality is, our financial situation is changing because the cost of living is rising and we are living longer. This means we need to support ourselves for an extended period of time in retirement.

Saving and investing for retirement is not a one-day event; it should form part of your overall financial plan, with set goals to ensure you can retire comfortably. And your plan should kick off as soon as you earn your first salary cheque.

Most employees earn about 480 pay cheques in their working lifetime between the ages of 25 and 65. The average person can expect to live until at least 85. This means they need to use these limited pay cheques to fund a retirement income of at least 240 months.

At this rate it is difficult enough to meet basic day-to-day expenses in retirement without being saddled with debt repayments, so any successful retirement strategy must include a debt repayment plan.

Pay off your short-term debt

Your retirement investments should not be allocated to debts that you acquired while you were still working. Short-term debt is one of the things that could derail retirement planning, so paying it off is highly important. An accredited financial adviser or your broker can give you advice on how best to do this.

Don’t pay off debt with your nest egg – make the necessary lifestyle changes instead

To get yourself out of debt, you may be tempted to cash in investments that are growing at between 10% and 12% a year to pay off debt with higher interest rates. However, you’ll miss out on the power of compound growth on the retirement investments.

For example, you may be tempted to cash in R100,000 of your investments to repay short-term debt. If you focused on paying off the debt by budgeting and cutting back on your lifestyle, you could probably be debt free within five years if you paid R2,900 a month, or used your bonuses and tax rebates to pay it off even faster.

Over five years at an interest rate of 25%, you would spend R174,000 to settle the R100,000 of debt. It takes discipline to start saving R2,900 a month once those debts are paid off. In the meantime, if the R100,000 is growing at 10% a year, it doubles in value every seven years. So, after seven years it is worth R200,000, after 14 years it is worth R400,000 and after 21 years it’s worth R800,000.

Manage your retirement plan throughout your life

As you move up in your profession, increase your savings accordingly. Every time your salary increases or you receive a bonus, put additional money aside for your savings and investments. You may think this is tough but you'll achieve excellent results in the long term. As extra money becomes available, do not absorb it into your lifestyle; rather save it.

This is a good option for salary earners because you also receive certain tax benefits if you save into a retirement product. You might not have more right now but you can plan for it in future. Retirement savings are also more than just a monthly debit. Lump-sum payments make a big difference as these can grow to a handsome amount.

To make sure that you get the most out of your retirement planning, speak to an accredited Liberty financial adviser. This will help you to implement a strategy that meets your individual and family goals so that when your final salary is paid, you are prepared to enjoy a comfortable retirement.

This article was paid for by Liberty Group SA.

X