Rita Cool, Certified Financial Planner at Alexander Forbes Financial Planning Consultants has these tips to help you with your pension fund planning.
1. Starting too late
When you are young you think that you have a lifetime to save for retirement but before you know it retirement is around the corner. The sooner you start the easier it is to reach your targets because of power of compound growth. You can save a smaller amount each month to get you to the same target over time.
2. Underestimating how much retirement will cost
It is important to have a budget so that you can see how much money you need each month. This will help you see how much income you need after retirement. Don’t think you will sit at home after retirement so you only need a food and electricity. Use today’s values in your calculations, inflation can be taken into account for projections. Once you know how much you need you can calculate how much you need to save to get that income.
3. Not paying off debt before retirement
At retirement you are allowed to take all your money in cash from a provident fund and up to one third in cash from a pension fund. The first R500 000 you take in cash from all your retirement products is not taxed. If you have not paid off all your debts by the time you retire you need to settle the debt from this cash portion. You might also not have enough cash available to pay all the debt and then you can lose that asset if your monthly income is not enough to pay off the debt monthly. The more debt you need to pay the less you have to provide you an income. Most debt interest is higher than interest received on investments so don’t invest if you still have debt, with the exception of house and car debt.
4. Not reviewing your investments.
As your targets and situation change so should your financial plan change. You don’t have to check the value daily but a least annually look at the statement and look at if you are on target or not.
5. Thinking your employer fund savings will be sufficient.
In the majority of cases you need to save extra especially if you started contributing later in life or if you had a break in contributions. Most employer funds allow additional voluntary contributions which is cheaper than saving in your own capacity. You can contribute up to 27.5% of your total taxable income annually, with a maximum of R350 000 and get the tax back on the contribution. Prevent yourself from being part of the 90% of people in SA who will need help from either your family, the community or the State.
6. Not making use of the investment structures available.
Choose the product to suit your needs. Each investment product has benefits and negatives. Retirement Annuities contributions have tax benefits but are not accessible before retirement. Unit trusts do not give you tax savings but are accessible. A Tax Free Savings Account is accessible and has tax benefits on the growth but will take a long time to show the benefits. By diversifying your savings you can structure your income more tax effectively after retirement.
7. Cashing in savings before retirement
Don’t take your cash from your employer’s fund every time you change jobs. You will have to start your savings from scratch and will need to save more and more each time to get you to the same target. There is tax on the cash you take on withdrawal which reduces your potential tax free portion at retirement as well.
8. Not knowing what products are available at retirement.
You can choose a fixed annuity or a living annuity after retirement. A fixed annuity gives you a guaranteed income for life but no capital is available to beneficiaries when you have passed away. In a Living Annuity you can leave a legacy but you are responsible for looking after your investments and spending and you can easily run out of income after a few years. Choose your investment portfolios to match your product.
9. Investing in the wrong portfolios.
Don’t be swayed by emotions. Especially when markets are not performing well or there is a lot of uncertainty in the market. If you are saving for a long term goal don’t make decisions based on short term volatility. Do not try to time the market. Don’t be too conservative over a long term because if you are afraid of volatility, you will not achieve your targets.
10. Getting advice from friends
You can get advice from your friends on what hairstyle to get but would you ask them to cut your hair? So why take financial advice from someone who is not a professional? Financial legislation changes often and you could be basing your decisions on outdated information. Make use of a Certified Financial Planner from a reputable company where you can get advice tailor made for you.