Kicking yourself for not saving earlier? You may be in your 40s or 50s but there’s still enough time to cultivate a healthy nest egg. Use these eight strategies to build enough capital to retire on your terms.
According to figures from the National Treasury, only 6% of South Africans have saved enough funds to retire comfortably. Yet even if you’re only a decade or two away from retirement, it’s not too late to be counted among the fortunate few. Use these strategies to take control of your financial future.
1. Formulate your retirement plan
You can’t start saving if you don’t know where you’re headed. You need a clear retirement plan in place that factors in your ideal retirement age and required monthly income. Generally speaking, to retire and maintain your current standard of living, you need to be in a position to replace 75% of your income, or more. Consider inflation to get a clearer idea of your future monthly expenses. Also factor in the rising costs of medical aid as well as your possible future needs for frail care or assisted living.
2. Reduce your living expenses
If you’re late to saving, cutting your monthly expenses now is vital so you can put away as much as possible. Consider which expenses you can cut now so that you’re comfortable later. Do you need takeaways each week? Can you reduce your grocery bills? Experts suggest dividing your income into needs, wants and savings, minimising costs from the first two categories and allocating more to the third.
3. Pay off debts
The last thing you need when you’re poised to retire is a mountain of debt. Once you’ve maximised your monthly savings, set aside a portion to pay off your debts. For example, allocate an extra monthly amount to car repayments and ensure your credit cards are paid off. Consider the snowball method: pay off your smallest debts first and build momentum as you tackle increasingly larger amounts.
4. Boost your income
Earn more now, save more for later. Chances are you’re pretty established in your career by now which often translates to higher earning potential. Yet it also means you may be in a rut or simply accustomed to earning a certain amount. It’s time to ask for that raise or consider seeking a higher-paying job. Alternatively, investigate alternative income sources. Turn your hobby into a side business or offer consulting services in your field. Consider which of these revenue streams you may be able to sustain once you reach retirement to supplement your income.
5. Make the right investment decisions
Knowing where you put your money is just as important as maximising your income. Considering market volatility, investment diversification is key. Experts advise making investments across asset classes, usually comprised of equities (stocks), fixed income (bonds), and cash equivalent or money market accounts. While you may want to increase your equity allocation if you’re late in the game, it’s generally advisable to make lower-risk investments as you edge closer to retirement. A major loss could potentially derail your timeline.
6. Bolster your retirement savings
If you haven’t been contributing to a retirement annuity (RA) up until now, start today. There are no age limits to RA contributions, they ensure consistent saving and they can be claimed as an annual tax deduction. However, don’t expect your RA to cover all of your future costs, especially if you’ve waited until your 40s or 50s to save. Your RA or Provident or Preservation fund should complement your investment portfolio.
7. Don’t cash out
Most preservation funds or RAs allow for savings access once you reach the age of 55. Don’t pick a short-term windfall over long-term financial protection. Always read the small print. An early withdrawal may force you into buying another annuity or diminish certain benefits. You should be adding to these funds for as long as possible, not depleting them.
8. Get the right advice
Underpinning the success of all these saving strategies is enlisting expert financial advice. As one of Southern Africa’s leading independent financial service providers, Carrick is perfectly positioned to help you make the right investment decisions to build sustainable wealth throughout your life.