Exposing the myths about retirement funding

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Millions of South Africans face a future of working well past the retirement age in order to shore up their finances.

Inadequate financial planning means many face running huge shortfalls on what they would actually need, in order to retire contentedly.

It is estimated that far less than 10% of South Africans will be able to retire comfortably and some may have to delay their retirement plans because of the recession.

Not giving enough consideration to planning for retirement means people may be forced to continue working for much longer than they had originally expected. Putting off a retirement savings plan, even for just a few years, can have a seriously detrimental effect on your final income at retirement.

We aim to dispel some of the myths currently surrounding retirement saving:

  1. Myth: My company pension scheme will be enough

Reality: Company pension schemes used to be seen as the only savings vehicle necessary for retirement.

Nowadays, however, most pension schemes will only end up paying out a much smaller percentage of your final salary. A company pension is a solid savings vehicle.  However, if you wish to maintain your lifestyle into retirement then you need to consider other assets too.

  1. Myth: My expenses will drop after I retire

Reality: It is true that in retirement, certain expenses will decline or even stop altogether. You no longer need to drive to work every day or pay into a retirement fund and hopefully your bond will also be paid off.

Nonetheless, other expenses such as health care, however, are likely to cost you far more in this period than at any other time in your life. While you may have a medical aid, sometimes there are additional health care expenses that you will need to meet.

  1. Myth: My house can help to finance my retirement

Reality: Using rental income from a second home to supplement your retirement can be a good idea.  A common trap many people fall into, however, is to look at their own home as a savings vehicle.  When you see your house appreciating from its original purchase price, it is easy to feel cash-rich and to assume that this extra equity will help to fund your retirement plans.

Equity released from your home can provide a lump sum, but you will still need somewhere to live afterwards and rent can quickly deplete savings. The other option is to release equity by downsizing or moving to a cheaper area. However, while your younger self may be willing to do this, you may need to reflect on whether you’ll feel the same upon reaching retirement.

  1. Myth: I can’t afford to get proper financial advice

Reality: Some people make the mistake of thinking that financial advice is a costly affair and is therefore only the reserve of the wealthy. The financial services industry is a maze of products and information and determining the right one for you without any proper advice is a hard task.

For anyone who wishes to retire comfortably, it is important to undertake a financial needs analysis. This will help identify how much money you need to retire comfortably, whether you are on track with your retirement plans and, if not, how to achieve these.

  1. Myth: I need to fund the children’s tuition fees first

Reality: It is critical to save for your children’s education, but not at the expense of your retirement funding.  Avoiding saving for retirement in order to fund your children’s tuition fees at university may be a noble cause but it’s an absolute no-go unless your children support you in your old age.

The key is to start investing early for both, which will alleviate the pressure later. Down the line, if there is no savings for their education, they will still be able to access student loans and grants if they have to, but there will be no such financial help for you when you retire. If money is tight, then encourage them to attend a local university and remain living at home, but don’t stop saving for your own retirement.

  1. Myth: I’m too young to think about retirement

Reality: Most young people make the mistake of thinking that retirement is so far in the future that they can put off thinking about saving for retirement until later in life. The reality, however, is that delaying your contributions even for just a few years can have a huge impact on your final retirement fund.

For example, a 25 year old man saving ZAR1 000 a month, with an investment return of 12%, would have a retirement pot of ZAR5.96 million at the age of 55. If this same man delayed his saving by just 5 years, his retirement pot at 55 would be worth half that amount at just ZAR3.07 million.

  1. Myth: I’m too old to start saving now

Reality: One common piece of advice about saving for retirement is to start as early as you can. However, if you’ve left it late and are only now beginning to think about what you will live on when you retire, don’t stick your head in the sand. It is better to save late than to not save at all. Put away as much of your salary as you comfortably can – a few years seriously dedicated to saving can make a massive difference in your final pension pot.

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About Author

Thabo Mphahlele is the BizNis Africa Head of Sales and Marketing. Mphahlele was previously MultiChoice Production Support Analyst responsible for developing and monitoring applications. In addition, Mphahlele develops and automates batch scripts and is responsible for the daily infrastructure maintenance at MultiChoice. As a Production Support Analyst, he is responsible for incident analysis solving , developing and constructing business reports for SQL and Oracle and implement change controls for the business. Additional responsibility includes monitoring system performance via SOA, Kibaba (Elasticsearch), H.P BSM, HP Sitescope. Mphahlele is responsible for creating infrastructure performance reports through HP Ops Analytics, monitoring payments via Splunk and in-house built-in tool and disaster recovery simulation and testing. At Nashua Mobile, he was responsible for application development and enhancing the web sites At South West Gauteng College, he was the IT Technician and Network Administrator. During his tenure at Double Digit Media, he was he focused on application and web site development for new and existing clients Mphahlele contributes as a Content Manager for BizNis Africa.

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