DailySun
As highlighted in the 2023/2024 Retirement Reality report, it is alarming that only 6% of people are properly prepared for retirement. This underscores the necessity of examining how elements such as extending your working years can affect your retirement readiness.
If you want to discuss your retirement possibilities with experienced investment professionals at no cost, get in touch with 10X Investments.
What difference can an extra year make?
You might be taken aback by the profound influence that an additional year of employment can exert on your retirement strategy.
To begin with, you keep contributing to your retirement funds. For example, if you earn R80,000 monthly and set aside 15% for your retirement, that results in an extra R144,000 saved over the year – this does not even consider your employer’s contributions or potential tax advantages.
Additionally, the benefits are twofold. Working an extra year not only increases your savings but also decreases the duration during which you will depend on these funds.
Let’s illustrate this with some numbers:
Imagine you plan to withdraw R50,000 monthly from your retirement savings to maintain your lifestyle. With a 5% annual drawdown, you would need about R12 million saved to sustain that for over 20 years. By working just one more year, you can reduce your retirement period while also granting your existing savings additional time to appreciate.
Speaking of appreciation, your savings could greatly benefit from that extra year. A portfolio of R5 million that grows at 6% over inflation could potentially add around R300,000 to your retirement fund – without requiring any additional contributions from you. This could cover several months of retirement expenses.*
* For simplicity, this example assumes stable withdrawal and inflation rates and does not factor in possible market fluctuations, variations in returns, fees, or taxes.
A simple truth about expenditures
Every rand you save from your monthly expenses essentially doubles its importance for retirement planning. How does this work? Imagine you are investing in a low-cost, high-performance living annuity and want to withdraw a sustainable income from it.
If you reduce your monthly expenses by R5, that can lead to significant savings each month prior to retirement. More importantly, it means you will need R1.2 million less in total savings to cover the same expenses in retirement at a defined drawdown rate.
Additionally, there’s another benefit: When you withdraw less from your living annuity, not only do you preserve more of your capital – you’re also likely to save on taxes. Remember, you pay income tax on whatever you withdraw from your living annuity. Drawing R30,000 monthly instead of R35,000 can result in substantial tax savings over time – funds that remain invested, working for you during retirement.
The critical impact of investment fees
While managing your daily expenses is essential, there’s another cost that can drastically influence your retirement timing and how long your funds will last: investment fees. The difference between paying 1% versus 2% or 3% in annual fees might seem trivial, but it can have major implications for your retirement.
Consider a practical scenario: Suppose you have R6 million in retirement savings and need R25,000 monthly income. With investment fees at 1% or less, you could realistically achieve this with a 5% drawdown rate. However, with 2% fees, you would have to lower your drawdown rate to 4% to create the same income securely while ensuring your savings last throughout retirement. This adjustment requires R7.5 million instead of R6 million in savings – an extra R1.5 million just to counteract the higher fees.
This fee difference might result in:
- Working several more years to amass an additional R1.5 million; or
- Reducing your monthly retirement income by R5,000 to maintain a sustainable drawdown rate.
In essence, investing with lower fees could potentially enable you to retire earlier, withdraw the same income from a smaller retirement portfolio, or keep your withdrawal rate lower to ensure your funds endure longer.
Our Living Annuity Calculator clearly shows this: lower fees allow more of your investment returns to remain invested and compounding over time rather than being consumed by costs. This could be the deciding factor between retiring now or having to work for several additional years to bolster your savings.
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You don’t have to choose between all or nothing
Retirement doesn’t have to be an either-or situation. Many South Africans are finding creative ways to supplement their income as they transition into retirement.
Think about rental properties. Earning R8,000 monthly from a rental property may initially appear minimal, but it can significantly impact how much you need to withdraw from your retirement savings. Alternatively, utilizing your skills for consulting work – earning R10,000 a month from occasional projects can mean R120,000 less you need to draw from your retirement fund annually.
Making wise lifestyle adjustments
Not all expense reductions require drastic sacrifices.
In fact, numerous retirement changes can lead to naturally lower costs:
- Housing often represents the largest expense during retirement. Downsizing to a smaller house or moving to a more affordable area can greatly lower monthly expenses while enabling you to liquidate capital from selling your home.
- Transportation costs generally decrease in retirement. Without the daily commute, many retirees find they can manage with one vehicle instead of two, or switch to a more fuel-efficient car.
- Leisure and dining habits typically evolve. Many retirees discover they spend less while experiencing more life pleasures, as they have the time to cook meals at home or participate in entertainment during off-peak hours.
Finding your balance
The decision about when to retire revolves around balancing several critical factors: your savings level, spending, ability to generate extra income, and personal circumstances. While working longer can improve your financial situation, effectively managing expenses and securing additional income streams may allow you to retire sooner than you think.
Consider these vital steps:
- Calculate your essential monthly expenses;
- Look for opportunities to reduce expenses;
- Explore potential additional income sources; and
- Utilize our Living Annuity Calculator to determine the sustainable income you can withdraw from your retirement savings.
Retirement planning is not merely about reaching a particular savings goal – it’s about crafting a sustainable financial strategy tailored to your distinct circumstances. Whether you choose to work longer, cut expenses, create extra income streams, or combine these approaches, understanding their relative effects will help you make informed decisions for your future. Connect with us if you wish to explore more options for your retirement investments.
10X Investments is a licensed Financial Services Provider (FSP). The 10X Living Annuity is underwritten by Guardrisk Life Limited. This article should not be treated as financial advice.
10X Investments offers a range of investment products directly to the public through the My10X investor portal online at www.10x.co.za, through corporate pension funds, and via your financial advisor.
Presented by 10X Investments.
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