My retirement savings?
Iwould like to start contributing more to my retirement. I am 45 years of age and this year starting a new job which does have a pension fund but that is my only retirement provision. I can save an extra R350 a month. Can you tell me more about investing in the market.
Certified financial planner Gerald Mwandiambira replies:
Edward is in a position many South Africans are in. Mid-life finances mean that there is often little surplus income to invest or save after paying school fees, car payments and mortgage bonds.
At the age of 45, one should already have at least one and a half times your annual salary in retirement savings to secure a financially viable pension at retirement.
What is often the case when people discover they are behind in their retirement fund, they are tempted with high-risk investments and “get rich quick” schemes. This could lead to losing more money. Edward must balance the need for capital growth against the fact that he has only 15 years to retirement and cannot afford to take the same risk profile as someone in their thirties, for example.
Because of the relatively low amount of free disposable income, and no mention of an emergency fund in place, Edward may consider a tax-free savings account (TFSA). These are provided by all investment houses and offer tax-free investment while providing full access should an emergency arise.
The longer Edward can contribute to the fund and not draw down on it, the more money he would have in retirement. Assuming the annual average return of a balanced fund of 12% invested for 20 years with monthly compounding, Edward can grow his monthly R350 investment to R350 000 by the time he is 65.
If Edward stretches his savings ability and saves R700 a month under the same conditions, this amount will be R700 000 and if he wants R2 million at 65, he needs to save R2 000 per month for 20 years.
If Edward invests R2 000 a month for 20 years, he will still have another R19 000 that he can invest before he reaches his lifetime limit of R500 000 under the current TFSA rules.
Should Edward have other savings and investments already, it is recommended that he consult a certified financial planning professional or his financial adviser for a tailored solution that takes into account his current life situation and responsibilities.