Richard Bray, 8 August 2018
Some say, simply invest 15% of your income from your first pay check. The later you start investing for retirement, the larger the figure needs to be. Currently, you can invest up to 27.5% of your gross income in all your retirement products combined and enjoy tax relief on those contributions. Your retirement products would include your company and private retirement fund, such as a retirement annuity, and while your money is in this fund you pay no tax on interest, dividends or growth.
Another guideline is the 4% rule. Simply put, once you’ve retired you should be able to live off 4% of your retirement investments each year – and bear in mind that you would still need to pay away the necessary tax from that 4% withdrawal. The 4% rule was created for people who want to retire earlier than the norm and want to make sure they never run out of money. That will only work if your accumulated retirement sum is growing by at least 4% more than inflation, on average per year. So, this rule does not work for very risk-averse investors who leave their retirement money in low-return, conservative funds.
To calculate how much you’d need to invest before you can retire using the 4% rule, simply multiply the amount you’d need to withdraw each year by 25. So, if you imagine that you’d need R10 000 each month or R120 000 annually before tax during your retirement, that would work out to you needing R3 million for your retirement. Our Smart Invest tool will help you determine how much you need to save every month to reach that figure. Remember to adjust your required amount for inflation.
Retirement needs can be complex and these rules of thumb may be too simplistic for you. Also, how you split your contributions between unit trusts and retirement products can make a big difference to your tax bill, and we therefore recommend that perhaps take a look at Sanlam’s retirement offering. Always speak to a financial adviser when making investment or retirement decisions to ensure you have the best options available.