January 6, 2022
  • January 6, 2022

I had to take early retirement: what are my options?

By on November 30, 2021 0

* Please note that the information provided below does not constitute financial advice; in fact, we are prohibited from giving specific advice. Generic information has been provided given the context of your question. We have limited details about you and your situation, and knowing additional details may affect the advice provided.

Being forced into early retirement can be a little intimidating. Most of us made a plan when we first start working: to save what we can in the hope that when we choose to retire, we can do it comfortably. However, as with you and many others over the past two years, circumstances change and leave you seven years before your expected retirement age, forcing you to restructure your entire pension plan.

Before discussing the different options related to your questions, it is important to understand the effect of early retirement on a person’s wallet. To illustrate this, the table below compares the cumulative effect of retirement at different ages with the same investment assumptions. If you saved R1500 per month in an investment earning a 9% per annum return from 25 years until your retirement at age 55, 60 or 65, you would have the following amounts in retirement:

Selected retirement ageRetirement value
55R2 014 987
60R3 230 252
65R5 132 968

Based on the above, by delaying retirement for 10 years between 55 and 65, you accumulate an R3 117,981. Unfortunately, given your circumstances, you have missed out on those vital last years of compound growth and therefore need to rethink your retirement strategy.

Where from here?

What options do you have with the funds at your disposal? Below, I discuss several investment strategies that can help you on your journey.

1. To minimize the tax impact on rental income, should I invest in a retirement pension?

Rental income you receive should be added to any other income you may earn, and the gross income you receive will be taxed at your average tax rate. There are two ways to reduce the amount of tax you pay on your rental income. First, any rental income can be reduced by the allowable expenses incurred during the rental period of the property. However, only expenses incurred in the production of such rental income can be claimed. These expenses include:

  • Tariffs and taxes;
  • Bond interests;
  • Advertisement;
  • Real estate agent fees;
  • Home insurance;
  • Gardening services;
  • Repairs respecting the rented area; and
  • Security and property taxes.

The second way is to invest in a retirement annuity. Retirement pensions are the basis of most retirement savings, as you only have access to funds from age 55. However, they are just as important after you retire.

The three main advantages of contributing to a retirement pension are:

  • Your annual taxable income is reduced by the amount you contribute to a retirement pension during the tax period (subject to certain limits).
  • The retirement annuity returns are tax free.
  • You can reinvest your Sars tax refund into your retirement pension, increasing your total refund each year.

2. Where do you suggest I invest the balance of my savings? I looked at some of the previous articles on offshore retirement annuities and also looked at other opportunities like Nedbank’s 60 month fixed deposit for people over 55 – which offers more than 10% of interest – and other options like the Coronation Top 20 Fund, which has achieved an average growth rate of around 14% over the past nine years after fees.

3. My financial situation has also improved slightly over the past three months (I managed to find a job, but without a pension) and I am now earning a salary. I can save an additional 50,000 rand per month for at least a year. What can I do with these additional savings?

When it comes to discretionary savings, there are many other options available to you.

However, before making a decision on which type of investment vehicle to use, you should ask yourself the following questions:

  • What is my investment horizon?
  • Do I have access to the funds?
  • What is my risk appetite?

These three questions will guide you towards an investment strategy tailored to your specific needs and goals.

Based on your scenario, we’ll assume the following:

  • You will invest for more than 10 years by contributing regularly with your disposable income.
  • You will need to have access to the cash if you need to cover unforeseen expenses or earn an income.
  • A moderately aggressive risk profile, as your main goal is to build an asset base for future use.

The most suitable investment based on the above assumptions may be an investment in a local or offshore mutual fund. A mutual fund is a great tool for building a diversified portfolio as it can cover a variety of asset classes, both locally and internationally. These asset classes include stocks, bonds, cash and real estate. A mutual fund is a flexible investment product with sufficient liquidity if you need it.

The chart below illustrates how to invest your extra R50,000 per month for just one year and then let the portfolio grow for 10 years in total. With the mandate of portfolios taking different levels of risk.

When building a portfolio, the key is to select a diverse mix of funds and managers that actively manage asset classes. These fund managers can shift the fund’s weightings to specific asset classes in order to take advantage of market movements. Your choice of fund will ultimately depend on your circumstances, your investment horizon and your risk profile.

4. As far as I know, I cannot stop pension withdrawals, but I can reduce the withdrawal rate to 2.5% for at least the time I am re-employed.

A life annuity is a great way to reinvest your retirement savings, whether it comes from a pension fund, contingency fund, preservation fund or retirement annuity. The life annuity provides you with income and gives you the ability to structure the underlying assets according to your retirement goals. He also does not need to comply with Article 28 of the Pension Fund Law.

To make income last through your retirement years, you need to consider the maximum amount you can withdraw without eroding capital. You are currently allowed to withdraw a minimum of 2.5% up to a maximum of 17.5% and can only change your withdrawal rate on the anniversary date of your retirement product. If you are in a position where you can reduce your draw rate to a minimum, we recommend that you do so. This would allow more of your funds to remain invested in the market and therefore remain exposed to potential growth.

Bring it all home

Don’t put all your eggs in one basket! A great way to navigate early retirement may be to combine the investment tools mentioned above and an emergency fund. Having the opportunity to work again will take some of the pressure you might face if you can allocate your income accordingly.

Ideally, it would help to allocate a portion of your earnings to a retirement annuity and a mutual fund. By allocating your funds to a retirement annuity, you can reduce your taxable income and take advantage of new savings. The mutual fund portfolio can be structured with underlying funds for long-term capital growth and be assured that the product offers liquidity and flexibility.

If income is not an issue, it would be beneficial to reduce your life annuity income or pension fund income to a minimum of 2.50%, as this would leave more capital exposed to further growth as you replenish. your base capital.

Building a well-structured investment portfolio that offers diversification across different asset classes and having a well-thought-out retirement plan that matches your financial needs will make a significant difference as you navigate the uncertainty of the future.

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