As outlined in the 2023/2024 Retirement Reality report, it is troubling to note that only 6% of individuals have prepared adequately for retirement. This underscores the necessity of examining how aspects like extending your working years can affect your retirement preparedness.
If you are interested in discussing your retirement options with experienced investment professionals at no cost, contact 10X Investments.
What difference does one extra year make?
You might be astonished at how significantly just one more year of work can impact your retirement planning.
To start, you will continue to add to your retirement savings. For example, if your monthly salary is R80 000 and you save 15% for retirement, that translates to an extra R144 000 saved over the year – not including your employer’s contributions or the tax advantages.
Additionally, the benefits are twofold. Working for one more year not only results in increased savings but also decreases the time you will need to depend on those savings.
Let’s illustrate this with specific numbers:
Imagine you want to withdraw R50 000 monthly from your retirement savings to maintain your lifestyle. With a 5% yearly drawdown, you’d need around R12 million saved to support that over 20+ years of retirement. By working just one extra year, you can reduce your retirement duration while giving your current savings more time to grow.
Speaking of growth, your savings could greatly benefit from that additional year. A portfolio of R5 million that increases by 6% above inflation might add approximately R300 000 to your retirement fund – and this would happen without you needing to make any further contributions. This sum could cover several months’ worth of retirement expenses.*
* For simplicity’s sake, this hypothetical scenario does not include potential market fluctuations, variations in returns, fees, or taxes, and assumes consistent withdrawal and inflation rates.
A straightforward truth about expenses
Every rand you reduce from your monthly expenses effectively doubles in importance for retirement planning. How is that so? Imagine you are investing in a low-cost, high-performance living annuity and wish to draw sustainable income from it.
If you trim your monthly costs by R5, that can aggregate to savings each month leading up to your retirement. More critically, it implies you will need R1.2 million less in total savings to cover the same expenses in retirement at a specific drawdown rate.
Furthermore, there’s another advantage: By withdrawing less from your living annuity, you conserve more of your capital – and likely save on taxes too. Remember that you pay income tax on whatever you withdraw from your living annuity. Drawing R30 000 monthly instead of R35 000 can produce considerable tax savings over time – funds that will remain invested, working for you during retirement.
The critical impact of investment fees
While managing your daily expenses is essential, there’s another cost that can profoundly affect both your retirement timing and the longevity of your funds: investment fees. The difference between paying 1% versus 2% or 3% in annual fees may appear minor, but it can have substantial implications for your retirement.
Consider a real-life example: If you have R6 million in retirement savings and need R25 000 monthly income, with investment fees at 1% or lower, you could potentially achieve this with a 5% drawdown rate. However, with 2% fees, you would need to reduce your drawdown rate to 4% to confidently generate the same income while ensuring your savings last throughout retirement. This adjustment means you’d need R7.5 million instead of R6 million in savings – an additional R1.5 million just to offset the higher fees.
This variation in fees could necessitate:
- Working several more years to earn that extra R1.5 million; or
- Reducing your monthly retirement income by R5 000 to sustain a sustainable drawdown rate.
In summary, investing with lower fees could allow you to retire earlier, withdraw the same income from a smaller retirement portfolio, or keep your withdrawal rate lower to extend the longevity of your funds.
Our Living Annuity Calculator clearly demonstrates this: lower fees mean more of your investment returns stay invested and compound over time rather than being eaten away by costs. This could be the pivotal factor between retiring now or needing to work for several additional years to build up your savings.
Did you know you can see if your investments could perform better with a free comparison report from 10X Investments?
You don’t have to choose between all or nothing
Retirement doesn’t have to be an all-or-nothing decision. Many South Africans are creatively combining various income sources as they transition into retirement.
Think about rental properties. Receiving R8 000 monthly from a rental property may seem trivial at first, but it can considerably impact how much you need to withdraw from your retirement savings. Alternatively, think about leveraging your skills for consulting work – bringing in R10 000 each month from occasional gigs means you need R120 000 less drawn from your retirement fund each year.
Making wise lifestyle choices
Not every reduction in expenses requires a significant sacrifice.
In fact, many transitions during retirement can lead to naturally lower expenses:
- Housing often accounts for the largest expense during retirement. Downsizing to a smaller home or moving to a more affordable area can greatly reduce monthly costs while allowing you to release capital from selling your property.
- Transportation costs usually drop in retirement. Without a daily commute, many retirees find they can manage with one car instead of two or switch to a more fuel-efficient vehicle.
- Leisure activities and dining habits frequently change. Many retirees find they spend less while enjoying more fulfilling life experiences, as they have more time to prepare home-cooked meals or enjoy entertainment at off-peak times.
Finding your balance
The decision of when to retire hinges on balancing several crucial factors: your savings level, expenses, ability to earn additional income, and personal circumstances. While extending your working years can improve your financial situation, managing expenses effectively and creating additional income streams may allow you to retire sooner than anticipated.
Consider these key steps:
- Calculate your essential monthly expenses;
- Explore opportunities for expense reduction;
- Look into potential income sources; and
- Utilize our Living Annuity Calculator to assess how much income you can sustainably withdraw from your retirement savings.
Retirement planning isn’t solely about hitting a specific savings target – it’s about establishing a sustainable financial framework tailored to your individual situation. Whether you choose to work longer, lower expenses, create extra income streams, or combine these methods, understanding their relative effects will help you make the best decisions for your future. Connect with us if you wish to delve deeper into your retirement investment options.
10X Investments is a licensed Financial Services Provider (FSP). The 10X Living Annuity is underwritten by Guardrisk Life Limited. This article is not intended as financial advice.
10X Investments offers various investment options to the public accessible through the My10X investor portal online at www.10x.co.za, through corporate pension funds, and via your financial advisor.
Presented by 10X Investments.
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