Saving for retirement is something that every adult needs to do. A lot of South Africans don’t save up for retirement. They end up depending on the government grant for their lifestyle, this grant only covers the necessities like food and clothing. This is a guide on how to save for retirement in South Africa.
Saving vs Investing
A lot of people are much more comfortable with saving money than investing it. Investments are usually portrayed as riskier; this has led a lot of people from staying away from them. However, you can accumulate a lot of more money by investing than saving.
Investing comes in different shapes and sizes, there are a lot of investment assets. Some are safer than others, there are assets that are super safe and earn a lot more money than regular savings. These assets may earn between 8 and 10%. Some of them are adjusted for inflation.
Regular vehicles for saving for retirement barely generate 3% per year on interest. They are mainly designed to be on par or barely beat the inflation rate. The inflation rate is currently at 4% in South Africa.
When it comes to putting money aside for retirement; it’s best to invest it. You can invest it in assets that are less risky and backed by the government. The earlier you start, the better.
Best ways to save for retirement in South Africa
1. Retirement annuities
A retirement annuity is a way of ensuring that you will receive income after you retire, this income may last a lifetime. This is a very attractive option for self-employed people and entrepreneurs.
You make contributions to your retirement annuity in a form of a fixed deposit or monthly contributions. This money can’t be accessed until you are 55 years old, you may not borrow against it and creditors don’t have access to it.
The government heavily encourages to invest in retirement annuities. Our government allows you to invest up to 28% of your taxable income to retirement annuities. The golden rule for investing for retirement is to invest 15% of your monthly income. You won’t pay tax on 28% of your income if you put it towards retirement annuities.
2. Bonds
A bond is a way for a government or corporate entities to raise money through the public. It allows investors to lend money to the government or corporate entities. These entities pay back all of your money plus interest. In order to keep this safe; we are going to focus on government bonds.
The government needs to raise money to build infrastructure such as roads or power stations. A lot of the times, the government doesn’t collect enough money from taxes to cover all costs of developmental projects. They borrow this money from willing investors. Unfortunately, you don’t have the option of depositing your money on monthly basis. You can only make a one-time fixed deposit. For retirement purposes, we recommend that you take the longest time available, this will allow you to earn a lot on interest. At the end of the period, you will receive your initial investment plus interest.
This is also a great option for when you are already in retirement, this is because government bonds pay out annually or semi-annually. You can use this money to cover your living expenses.
3. Mutual funds
A mutual fund is an investment vehicle that pools money from different investor, money that is used to buy securities. Mutual funds are a great way to save up money for retirement or even use them during retirement like bonds.
Mutual funds collect money from different investors and use this money to buy securities. These securities may be bonds, company stocks and other securities. A lot of mutual funds pay dividends semi-annually or annually.
Bottom line
All retirement plans offered by big corporations use your money to invest in different investment assets. The money you pay to your retirement annuity is used to buy bonds, company stocks and other securities. The main advantage with choosing a retirement plan is that you won’t be able to access your money as easily as you would if you were investing by yourself.
However, it’s extremely important to remain disciplined and not neglect other traditional ways of saving for retirement. The interest you will accumulate from the above avenues is way more than you would normally get. If you don’t feel comfortable with investing by yourself then it’s best to buy retirement plans (annuities) from companies like Old Mutual.
Conclusion
It’s important to note that saving for retirement is a very delicate thing that should be treated with the utmost care. Please contact a financial adviser to get more clarity on what you must do. The above are the best ways to save for retirement, do you have any thoughts or questions? Comment below.
