“What you sow, you will reap” is probably the most underrated and ignored best “free” financial advice one will ever receive. When preparing financially for your retirement the reality is that what you sowed will be what you reap!
No matter how you carve it, we are all going to get older and a time might come when we will have to look after ourselves financially from our own pockets. Will we be ready and is there anything we can do to prepare for that day?
Being ready for retirement depends on how much urgency you give the topic during your lifetime and on the retirement strategies you put in place during your various life stages.
Each life stage is exciting, our wacky twenties, daring thirties, naughty forties, fabulous fifties and sensational sixties all build character and define us. We can’t skip a stage as each prepares us for the next. Retirement investing is similar with several investment strategies you can set in motion during each life stage to prepare you for your retirement years. Skipping an investment “life stage” could be costly!
Although each person’s circumstances differ, below are some retirement investment strategies by age that I think can set most people up nicely for their retirement years:
Your 20’s
The “set up” years. In your 20’s the sooner you start investing the better!
|
Investment Strategies |
Purpose |
|
Emergency funds - cash investments |
To cover any unexpected expenses for emergencies thus protecting your retirement investments as you will not need to dip into these when emergencies hit. Save at least enough to cover 3 months expenses. If you draw from here then top it up back to the 3 month target. |
|
Tax Free Investments (TFSA) |
To build up tax free income for your retirement years – the earlier you start the better and more tax free income you can generate. There are annual contribution limits to bear in mind. A TFSA means more money in your camp and less in SARS’ at retirement |
|
Direct Unit Trusts |
Look for unit trusts both local and global that have great growth prospects over time to help with retirement savings. There are also advantages like Capital Gains Tax at a lower tax rate than your marginal rate. |
Your 30’s
Hopefully you are more stable in your 30’s with regards to your income. A retirement annuity is a great strategy to add to your start up investments.
|
Investment Strategies |
Purpose |
|
Emergency funds |
Set up in your 20’s |
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Tax Free Investments |
|
|
Direct Unit Trusts |
|
|
Retirement Annuity (RA) |
Supplement Retirement Income and get tax back / reduce your tax liability with SARS. All growth in a RA is tax free J. The law states that you can retire anywhere after the age of 55 from an RA. NB - Your RA will be converted into an annuity (Living or Life) at retirement to provide you with an income for life |
Your 40’s
You are probably going to start overthinking your finances in your 40’s and possibly panic a little, or a lot! That’s a good thing, as it means you are serious about investing and can start maximizing your investments’ true potential.
You should be well diversified with retirement investment products in your 40’s. Now’s the time to contribute as much as you can, maximizing your TFSA limits and getting as much tax back from SARS via your RA contributions and reinvest these for your retirement. Yip - Getting SARS to help fund your retirement – Clever!
You can even start adding some other and alternative investments to your mix, as long as you understand the risks and your base investments are in place.
|
Investment Strategies |
Purpose |
|
Emergency funds |
Set up in your 20’s |
|
Tax Free Investments |
|
|
Direct Unit Trusts |
|
|
Retirement Annuity |
Set up in your 30’s |
|
Alternative Investments and other |
Share trading accounts, property, antiques, hedges, warrants, futures, ETF’s etc. |
Your 50’s
Consider investments that offer guarantees with additional tax advantages to supplement your income at retirement.
|
Investment Strategies |
Purpose |
|
Emergency funds |
Set up in your 20’s |
|
Tax Free Investments |
|
|
Direct Unit Trusts |
|
|
Retirement Annuity |
Set up in your 30’s |
|
Alternative Investments |
Set up in your 40’s |
|
Endowments and Capital Protection / preservation investments |
If you are paying tax of 35% or more, endowments become attractive. You can also leave money directly to your beneficiaries. Favorable after tax income is also possible.
|
Your 60’s and beyond…
Generally most people opt to retire in their 60’s seeking investments that will provide an income. Living and Life Annuities are just such products.
|
Investment Strategies |
Purpose |
|
Emergency funds |
Set up in your 20’s |
|
Tax Free Investments |
|
|
Direct Unit Trusts |
|
|
Retirement Annuity |
Set up in your 30’s |
|
Alternative Investments |
Set up in your 40’s |
|
Endowments |
Set up in your 50’s |
|
Living or Life Annuities or a combinations of these |
These products provide you with an income for life based on how much you add to them. Your RA and retirement funds (Pension, Provident, Preservation) source these investments only. Hence the more you saved in your RA for example, the more you can add to these products and the more income you could get at retirement |
If you implemented solid retirement strategies during each life stage, you should have options at retirement that are:
- Tax free (TFSA),
- Tax efficient (Endowments),
- Liquid (Unit Trusts, Emergency Funds),
- Guaranteed (Life Annuity),
- Able to provide for your beneficiaries (Living Annuity and Endowments), and
- Able to provide you with income for life (Living annuity, life annuity, Unit trusts, Endowments, TFSA)
If not, you might have to play catchup which could push your retirement deep into your 70’s or beyond.
Now’s the time to sow!
Gareth van Deventer CFP®
OUTvest is an authorised FSP. Views expressed in this article is that of the financial adviser and not a full representation of OUTvest’s stance. All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Both Exchange Traded Fund(s) (ETF) and unit trusts are collective investment schemes, however, these products are priced and traded differently. A unit trust is priced once a day whereas an ETF is trading continuously throughout the day during JSE trading hours. Ts and Cs apply.
