Question:
I’ve just started my first job and want to make sure that I’m making adequate provision for my retirement. How would I go about considering a retirement plan?

Answer:
We tend to think of our retirement plans in much the same way as a visit to the dentist, and mostly for the same reason. We suspect that we will be in for a painful and unpleasant surprise. In reality, though, our retirement planning is not nearly as bad — or as painful — as we think it might be. We only need to break it down into bite-size chunks to understand where we are and where we are going.

So how do we go about finding the starting point? As a point of departure, we need to understand how much retirement funds and how much discretionary funds we have.

Our retirement funds consist of our pension/provident fund at work, retirement annuities and any possible preservation funds or living annuities we may have. With the exception of the pension/provident fund, which your HR department will be able to help you with, your financial planner or insurance- or investment broker should be able to get you the details of what you have in this category. What we want to deal with is the values of these policies as they stand today. Often future projections are fairly meaningless based on the investment strategies you might be pursuing inside of these vehicles.

The second area you need to investigate is that of your discretionary savings. This would include unit trusts, share portfolios, offshore investments, endowment policies, cash holdings and any other sources of investment earmarked for funding your lifestyle requirements once you retire. Add the totals to your retirement funds and you will have a clear idea of what you have to work with.

We now need to explore how much we should be saving. As a rule of thumb, you would want to target around 20 percent of your net income. This, however, depends on how much time you have to save, how much growth you will get and how large a portion of your existing income you will need at retirement.

Starting off on a zero base and saving 20 percent of your net income in a high growth portfolio means that you will need about 25 years to get to a level where you can sustain your current income. If you save only 10 percent, it will take you 32 years to get there. This means that if you start saving at age 30 and invest 10 percent of your net income, you will barely get there at age 62. And if your lifestyle needs change in that time — and they will — you will need to save more. Therefore, investing a portion of your financial windfalls (like bonuses or inheritances) will become a vital part of your financial strategy.

The above also means that we need to think very carefully about how we deal with the money that we accumulate over this period. One of our major challenges is changing jobs. When we change jobs, we are confronted with the option to take a fairly significant amount in cash when we move from one employer to another. This temptation is one of the single greatest obstacles that keep us from accumulating the wealth we need to retire successfully and more often than not, leads to catastrophic consequences. One of the greatest disciplines we can learn when it comes to investing for retirement is that what goes to my retirement pool, stays in my retirement pool.

As far as tax considerations are concerned, the rule of thumb is that around 15 percent of your gross income is tax deductible if you invest it in a retirement vehicle. If you belong to a pension or provident fund, this would make up the lion’s share of your deduction. Should you not belong to a pension or provident fund, your contributions towards retirement annuities will fall into this pool.

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