What are your retirement options?

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24 Mar, 2021

WHAT ARE YOUR RETIREMENT OPTIONS?

 

Regardless of your age now, Retirement needs to be something that you consider and have a plan in place to cater for it. Whether your plan is to work your entire life and never set your foot off the gas, or to retire as quickly as possible by building income generating assets – the choice is entirely up to you.

 

The first thing you need to consider is what you personally want out of life. Do you want to work forever or do you want to retire at some point? If you plan on working non-stop from 9am – 5pm for the rest of your life, then this article probably isn’t for you as continuously working non-stop is no retirement.

 

Let’s give retirement a vague definition.

 

According to www.investopia.com – ‘Retirement refers to the time of life when one chooses to permanently leave the workforce behind.’

I don’t really like this definition as it means we longer work at all, and for most retirees they still do something to provide a source of income to supplement their retirement plans. Not working at all would also bring about a sense of boredom after a while – at least that’s what I think.

I would define retirement more in terms of becoming financially free so that we can do what we want with our most valuable resource – TIME. Maybe you’re 35 years old and already living your own version of retirement where you spend your time on your own terms, doing what you want to do without the financial stresses.

 

Traditional Retirement

 

The more traditional route to retirement is working until 65 and then living off our Retirement Annuities or Pension Funds until we die at age 90 with R0 left in our retirement account. Life has changed quite a lot over the years though and in South Africa, only around 5% of retirees can successfully live off their retirement savings without having to work again (this is at 75% of their salaried income).

There is certainly space for this type of retirement plan and lots of companies to choose from to help you achieve your financial freedom this way. You can read more about this HERE.

This type of retirement plan is great because the government gives us some nice tax breaks to help us reach our retirement goals. If you earn R20 000 per month and fall into the 20% tax bracket – for every R1000 you contribute to a Retirement Annuity, SARS will give you R200 back (this gets a bit more complicated but that is a simple example). Although we only invested R800, our fund balance will start off at R1000 and any interest earned on these funds is not taxed again until retirement which is awesome.

To successfully retire using only a Retirement Annuity/Pension Fund, the younger you start the better. If you only decide at 50 that you want to start saving for retirement, you will need to save much more as you will essentially be saving for 15 years to cater for a 25-year retirement (65 – 90). Starting at 25, you will have 40 years to save for the same 25 years in retirement which will obviously be much easier and much more affordable.

 

FIRE Movement

 

The movement, Financial Independence Retire Early is all about retiring as fast as possible. For me, the FIRE movement is about having all your living expenses taken care of by building income generating assets so that you no longer need to work to live. This movement is based on living as simply as possible now so that you can save much more and become financially free as quickly as possible (investing around 50% – 75% of your income). You might still contribute a little to Retirement Savings, but it is more about building up a steady flow of income that will continue even when you are no longer working. An example of this would be buying a property and renting it out – the rental income would be part of what you then live off.

If you can live simply and invest your money wisely to make it work for you, then you might be able to ‘retire’ early. I personally don’t like to think of it as early retirement but more about freeing up your time so that you can do what you genuinely enjoy in life.

For this process to work for you, you will need complete focus on your retirement dreams:

  • Dream and Plan for retirement young – the main aim here is to retire in your 30s or 40s.
  • Find ways to keep your expenses low – know exactly where your money is going and be brutal about cutting anything that you don’t NEED.
  • Always look for ways to boost your income – get creative about making extra cash
  • Saving and Investing must be a priority – the most important thing here is to save and invest as much as you can.

 

Mixed Retirement

 

For this approach, I believe you need to invest wisely in income generating assets as well as the traditional retirement path through Retirement Annuities. Depending on your affordability, the traditional path is a great way to secure a % of your future income and benefit from a tax perspective in the process. If SARS is willing to supplement a portion of your retirement plan so you don’t become a burden on the state – let them help you.

I would also suggest looking into investment properties (not shares but physical properties), once you’ve purchased and paid off your first investment property and have a tenant paying you rent monthly – use that to buy the next property in your portfolio. If each R1 000 000 property can give you a monthly profit of around R6000 (R8000 rent less say R2000 rates and levies), work out how many you need to cover your retirement needs. R5 000 000 in properties can give you a monthly income of around R30 000 plus you still own the appreciating assets if you ever need more capital.

Another way to supplement your retirement savings is to start a business aligned to your specialties or invest in a start-up where you receive a % of monthly profits. The best alternative investments for retirement are the ones where you don’t need to be actively involved or at least something that takes up very little of your valuable time.

 

To go into more detail about each of the options above, we have written articles relating to them all here:

TRADITIONAL RETIREMENT

 

 

 

 

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