Rerouting your retirement
Now that you are on a single income again, you need to re-think your retirement. Apart from your employers pension or provident fund that you are contributing to also contribute towards your own Retirement Annuity and / or a Tax Free Investment, keeping in mind that you could retire within the next 20 years or earlier.
When you claim your share from your ex-spouse’s retirement fund you can transfer to your own Preservation Fund tax free.
- Once your share has been transferred to your own preservation fund, you are able to make one full or partial withdrawal before retirement age of 55 years, the remaining balance cannot be accessed until retirement age. This option is subject to any requirements of the transferring fund rules and/or legislation. This should be your last option if you are in financial trouble.
There are 4 important “R’s” that will screw up your retirement planning:
- Resignation and you take the benefit in cash.
- Retiring early.
- Returns on your retirement capital.
(And off coarse debt will severely impact your retirement).
Resigning from your employer and taking your retirement capital in cash is a sure way to spend your future retirement income. Not only will you pay tax on the capital but you will destroy years of compounding which is very difficult to replace.
Retrenchment becomes a big risk after the age of 50 and you find yourself unemployed for one year or longer. If you do have a severance package equal to 1 years’ salary you can live from and it takes a year to secure new employment, you should be fine. Remember: You did not contribute towards retirement during this year.
Being unemployed for longer than a year or if your severance package was just enough to cover 3 months expenses you will be in trouble. Just think about how replaceable you are after the age of 40-50, not only by someone younger and cheaper than you, but by robots that can do your work. It is so important not only to upskill your qualifications but also to have surplus capital.
Life is just too expensive and too long, people especially women live longer! Forget this idea of going on early retirement. If you retire early you lock in your earnings ability and within a short period inflation will start to consume your capital, when you realise 5 or ten years down the line you don’t have enough capital left, it would be very difficult to get back into the labour market.
Also remember that when your expenses increase, you will draw more income from your capital just to survive from month to month and the next thing you know you are out of capital.
Most people won’t know this but the Pension Fund Act only allows you to invest in moderate risk funds in other word there is a cap on the growth that your money can generate. I would suggest allocating additional funds even if it is just R500 a month in a Tax Free Investment or other discretionary investments with higher risk equity funds that will give you 100% exposure to equities. TIME is on your side in this case depending on when you start.
How much do I need for retirement?
There are 2 resources in this word that are truly mismanaged – The one is TIME and the other is MONEY. The one you can save and the other you can invest, which sounds really easy to do but in reality most people do neither. Simply because it is something that is never structured or planned because “life” is so hard and spending is so easy.
When you add these 2 resources together then you get what I call exponential growth.
Financially speaking it is called compound interest.
When people ask me “How much do I need for retirement?” my answer is always whatever you think it is – DOUBLE IT! Especially after divorce.
So let start with some statistics. It is a fact that only 6% of people in South Africa can retire with the same standard of living and replace their income with their retirement capital. The biggest asset manager in South Africa looked the percentage that retirees are drawing from their Living Annuities and they predict that 70% of those retirees are drawing to much income and will run out of money.
If you don’t plan and invest towards your retirement you are just deferring your retirement nightmare.
We encourage all my clients to invest, invest, and invest. If you are divorced you could really use this new financial power that you earned after the divorce and really start to make smart financial decisions.
This is where it goes wrong?
Once you get to retirement there are four things that could potentially ruin your retirement;
- Inflation – The cost by which living expenses increase every year.
- Medical inflation – Medical inflation is nearly double that of CPI.
- Tax – You still have a tax liability on the income that you earn and most people forget about this.
- Longevity – Good healthcare and health technologies will keep you alive much longer than 50 60 years ago.
- And if you divorced halfway through your career you can add to the above risks “time” as the biggest nightmare. Just remember if you had a pension fund at the age of 45 with a value of R2milion, that has been halved due to a pension claim against your fund, you still have to get it back to R2 million and then try to double it from there, 20 years might not be enough. You are going to have insufficient retirement capital, that will force to take much higher income from the start and you will run out of money. Don’t let this stop you from investing after your divorce. Set small financial goals like, after year 1 of divorce, like I will contribute R700 towards my tax free investment.
Inflation is just a bugger and one of the worst factors to deal with after retirement, just look at the impact of the R/$ exchange rate on fuel increases.
Annual medical scheme contribution increases is almost always double that of normal inflation . Medical aids have become risk management tools controlled by the product provider. It is not designed to pay for “brille and pille”! Here is an example of a premium for a comprehensive medical aid, R4 953pm and of that R1 238 is allocated towards savings. A few GP visits, a little over the counter medication and vitamins and your savings is spend and we all know that after age 65 we tend get sick more often.
When you work for an employer for 40 years they deduct your taxes every month and pay the PAYE over to SARS. When you retire you could consider yourself being self-employed having to live of your retirement capital, so as your own employer you are still liable for the tax on the income that you earn from your different investment and retirement vehicles.
Living longer is a manageable risk now that you know that your medical aid will pay for your stay in any hospital and that they are able to keep you alive as long as you have enough money. If the possibility already exist that you will live longer genetically or medically you should plan to retire with more capital than the 75% you have been told to aim for.
Don’t plan in a linear traditional way for your retirement, betting only on your employer’s pension fund, I use retirement building blocks and stack my retirement dates from different products or assets.
- Get an additional RA to just fund your medical expenses for when you are older, for example a RA that you can retire from at age 80.
- Invest in a TAX FREE investment to counter tax liabilities or other expenses. But I would suggest you start this the day you walk out of the divorce court.
- Invest in higher risk equity type solutions that will outperform inflation.
- Perhaps invest in a second property?
You can consider retiring later, perhaps at age 70.
If you were a salaried employee, you would have received approximately 420 pay checks, if you had 3 kids you would have been on a year’s leave at a 75% salary and your contributions would also have been reduced. Kids cost so much money and after a divorce your income gets spend on them, I do understand this, but if you retire at age 65 and make it to age 90 you will need to pay yourself 300 pay checks from your own retirement capital. You have to put yourself first after divorce, “pay yourself” first via your investment budget for example investing in a tax free investment vehicle over and above your pension contributions.
Remember be smart be FINSMART!