Reader Question: I am 52 and recently got a better-paying job overseas. I intend to retire at 65. My goal is to secure financial freedom and save enough to last me my retirement period.

My background: 

1. All my other debts are cleared except my car balance which has a balance of R257 000 (52 months remaining).
2. I put my provident fund in preservation. The current value is R334 000.
3. I have a VIP RETIREMENT ANNUITY LINKED policy which I took in 2004 at liberty.
4. It has a current value of R55 000 and it matures in 2023. I haven’t paid premiums for about 7 years.
5. Currently, my monthly income – monthly expenses = R30000.
6. I have calculated my financial needs and I will need R16000 after tax in today's terms when I retire at 65.
   
   My Plan (using the R30000 extra)

1. Open an RA (retirement annuity) and save R7250/month.
2. Open a Tax-free savings and save R2750/month.
3. Save R15000 in a savings account till March 2020 for a deposit into a bond. I don’t own a property but I want to buy a small home, easy to manage.
4. My Current rent is R7000. Therefore, my plan is to get a bond max R1 000 000 and pay (R21000/month). Once the bond is repaid the excess money will go to the RA.
5. Put an extra R5000 towards the car repayment. (This car I'd like just to get rid of because I'm away and paying for something I don’t use. However, I can’t because the contract is still new).
6. I want to be ready for retirement at 65. However, I will only retire at 68.
   
   Are these plans wise? What is your opinion?
   

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Please note that the information provided below does not constitute financial advice; in fact, we are precluded from giving specific advice. Generic information has been applied given the context of your question. We have limited details about you and your circumstances - such detail may impact any advice provided.   

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Dear reader, 

It looks like you have put a lot of thought into your financial future; well done! I’ll get to the numbers side of your plan later on in my response, but to start, here a few opening thoughts:

• Your asset allocation (your allocation to cash bonds, property and equity both locally and globally) is going to play a big role in your investment/retirement outcome. The largest risk you face is perhaps the risk of being too cautious. You have 13-16 years to save as much as you can and make your savings grow as much as possible. By way of example:
  • R1m invested for 15 years with a 7% return has a future value of R2 759 032.
  • R1m invested for 15 years with a 9.5% return has a future value of R3 901 322.

• Retirement annuities have many benefits, inter alia:
  • Contributions are tax deductible up to the prescribed limits.   
  • Growth within the product is tax free.
  • On death there is no Estate Duty and no executor fees. 

Careful consideration must be given to your product blend, as you need to make sure you have sufficient liquidity during retirement; you may live for 30 years post-retirement and a lot can happen in that time. Retirement annuities have limited liquidity, both pre- and post-retirement. Another consideration are the investment restrictions applicable to all pre-retirement products.  

• Costs are going to play a role in your return, but be mindful that low cost doesn’t automatically translate to a better return. You must target reasonable costs, in a portfolio that can deliver your targeted return. 
• You also need to pay attention to the risk side of financial planning, which involves having adequate insurance in the event you become disabled or have a health event. It may be that you also need life cover in lieu of your liabilities.  

Ok, now we can get to the fun part: doing the calculations to check whether you’ll reach your retirement goal within the constructs of your planned savings. I have had to make some assumptions in order to do the financial projections. Assumption one is that you enjoy a net annualised return of 9% and inflation is 5% per annum; assumption two is that you do retire at age 65 and the third assumption is that once the car is paid off you save the additional R5 000 per month repayment.  

• It will take approximately 5 years for you to pay off a R1m bond, assuming an interest rate of 10%. Thereafter the R21 000 p.m. will be allocated to savings.
• It will take approximately 28 months to pay off your car, assuming an interest rate of 12.5%, after which you’ll add the extra R5 000 to savings. 

The future value of your savings at age 65 would look like this:

Description	Current Value	Future value
Existing RA and preservation funds	R 389 000	R 1192 598
New RA	R 7250 p.m.	R 2150 366
New TFSA	R 2250 p.m	R 667 355
Bond money (8 years of payments towards savings)	R 21000 p.m.	R 2959 007
Car money (128 months of payments towards savings)	R 5000 p.m	R 1076 250
TOTAL		R 8045 576

 

At age 65, your current required income of R16 000 per month translates to R30 170 using our assumed inflation. We ran the numbers using our return and inflation assumptions, and the good news is that you would only run out of capital at age 130.  There are, however, three major things to consider in these types of calculations:

1. Returns are calculated in straight line (sequencing risk).  
2. The terms are very long. Small changes in assumed return and inflation can have a big impact. 
3. The projections don’t take into account any ad hoc lump sum you’ll require along the way. 
   
   

Following on from point 2 above, if we assume that inflation averages 7% instead of 5%, your capital runs out at age 96. Now keep inflation at 7% but drop your return to 8%, and you now risk running out of money at age 91.  

Your safest plan will be to work as long as you can - and save as much as you can along the way. It’s important to remember to live, and to enjoy some of the fruits of your labour.

Good luck!

For peace of mind in retirement, partner with an NFB Private Wealth Manager on your retirement planning journey. Find your Financial Adviser here.