How to maximise your retirement savings

2015-02-09 08:00

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Nonhlanhla Zaba, a financial planner at Liberty, says instead of suddenly panicking and rushing around to put extra money into your retirement savings, you can put in additional funds at any point during the tax year.

“For example, you could have topped up your retirement savings in December or January using your annual bonus. There is no reason to wait until the last minute,” she says.

If you put your R10?000 Christmas bonus into a retirement fund as a one-off contribution, after 30 years and an annual return of 10.6%, you could have an estimated additional R209?930 (before fees) at retirement.

The tax benefit on a retirement annuity is that you can claim one of the following options (whichever is the greater) as a tax deduction:

»At least 15% of your taxable income from non-retirement funding income, excluding any severance benefits; and

»R3?500, less your contributions to a retirement annuity.

An important point that many consumers are unaware of is that you can also claim a tax deduction of up to 7.5% of your taxable income when you save for your retirement via a pension fund. If you contribute to a pension fund via your employer, you should ideally consult your company’s HR department to clarify the maximum contribution you can make towards your pension fund.

“Some companies allow you to make an increased contribution, but you will often find that the default option is a lower option. The onus is on the employee to approach the HR department to request an increased contribution and then to check every year that this amount increases accordingly,” Zaba says.

“The bottom line is that the more you contribute toyour retirement savings, the bigger your tax deduction is and the less tax you pay,” Zaba says.

Once you have ensured that you have maximised both your retirement savings and your tax benefits, the next step you need to take is to check that you are invested correctly according toyour investment timeline.

“Each year, your retirement fund will send you a letter telling you how the fund has performed and what returns it has achieved. It will also allow you the opportunity to review your investment choices.

“Unfortunately, most people simply glance at the letter, check the final figure to see what they have saved and then continue on the default option,” she says. What you should be doing is looking at the returns achieved by the fund, but also considering whether or not you need to switch between the underlying investment portfolios. For example, 25-year-old Sbu has at least 35 years left to retirement, so he can invest aggressively because he has a longer investment timeline to recoup any losses. Mbali, on the other hand, is 55 and, because she is nearing retirement age, her focus will be on preserving her capital, so she will invest more conservatively. Possible investments strategies:

»Aggressive – This would have the maximum exposure to equities allowed for retirement funds and is ideal for a younger person who has 30 years left to retirement. The investment return will fluctuate but, over time, the returns will outweigh the losses. An aggressive fund usually aims to deliver returns of 7% above inflation over time.

»Moderately aggressive – This is a less aggressive strategy with a lower exposure to equities and aims to deliver 5% above inflation. This portfolio suits someone who has at least 15 years to retirement, but who is uncomfortable investing in a more aggressive fund.

»Moderate – This fund is aimed at people looking for investment growth as well as a measure of stability, and aims to return about 4% above inflation.

Moderately conservative or conservative portfolios focus on capital preservation rather than growth. These funds can be used to lower the risk profile of the fund closer to retirement if one plans on purchasing a life annuity in retirement. If one plans on converting to a living annuity, then a higher growth fund would be more appropriate.

As you move through different life stages, you should be checking that your investment portfolio and strategy within your retirement fund is suitable so that you maximise your savings. If you simply select the default option, it is likely to be conservative or moderate and you can end up losing out on years of growth unnecessarily.

“About a year before retirement, you need to start keeping a very close eye on your funds and you should be checking your statements once a month rather than just once a year,” Zaba cautions.

She says investors often wait until the last minute to switch out of an aggressive portfolio and can end up losing money.

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