RETIREMENT is a dreaded word in this country, where fewer than 10% of retirees are able to be financially independent at retirement. There are always so many pressing issues at hand that looking years and years ahead into how our finances will look at the age of 60 can seem distant and unimportant.
We all know how quickly time goes by and this period in your life creeps ever closer year by year; the critical factor is simple – the earlier you start, the better. Someone investing R500 a month at the age of 20, given an 8% growth per year and a retirement age of 60, could see their investment grow to over R1.7m in 40 years.
However, someone only starting to save for retirement at the age of 30 would need to invest R1 200 every month to get the same end result. The beauty of compound interest means the younger you start, the easier this whole process is going to be. The scary thing is that only about a quarter of individuals between the ages of 18 and 30 are saving for retirement.
Another thing that few take advantage of is the tax incentives that come with saving in a retirement fund (retirement annuity, provident fund and pension fund). These incentives allow for tax deductions on contributions up to 27.5% of an individual’s taxable income (capped at R350 000 per year).
This means that for an individual who is earning R200 000 per year, if they or their employer make contributions of R20 000 to their retirement fund during the course of the tax year, only R180 000 of their income is taxable. Based on the tax they have already paid during the year, they will get a rebate on the tax that the South African Revenue Service owes them, dependent on how much retirement savings they have made during the year.
Saving is difficult in general, especially in a country where household debt is around 80% of household income. We as a country need to become better at saving and drastically reduce our culture of spending more than we earn so that future generations do not fall into the same debt trap that many have today, making retirement saving a distant afterthought.