More than three decades ago, in 1977, 24 year-old Jonathon Cope’s* mother made a decision to save that would provide financial security for her son many years after she passed away.
Research has shown that as many as 94% of South Africans do not have sufficient retirement savings or provisions to enjoy retirement, let alone a comfortable retirement. As a result, they need to continue working in their retirement years, or depend on their family to support them.
The lack of a savings culture in South Africa means that people will enter retirement without having saved enough, compounded by the fact that they retire too early. Most pensioners underestimate the costs of retirement, particularly medical expenses.
Jonathon Cope’s mother understood the need to plan ahead for the future and save for her son. She had heard of investing as a form of saving and so decided to contact a financial advisor.
With the assistance of Liberty financial adviser, Ebrahim Talia, she took out a Retirement Annuity for her son which would mature when he turned 55. She paid the monthly premium of R125 until her death some years later, at which time Jonathon took over the payments. With no built in escalation, the premium remained at R125 per month for the next 31 years. By the time the policy matured, Jonathon and his mother had, in total, contributed R46 500 towards the policy.
In 2008, at the age of 55, Jonathon was paid out R1 545 736 – more than 33 times the amount he had contributed over the years. Of this, he could take out one third (R515 245) as a lump sum, and was taxed R38 744 on that amount, leaving him with R476 501 – a tenfold increase on the amount he had invested in total. In addition, he still had over R1 million left, which by law had to be used to buy an annuity.
How much do you need to retire comfortably
“The rule of thumb is that you need about 15 times your annual salary at retirement to receive a pension of 80 percent of your salary that should, after inflation, maintain your standard of living after retirement,” says, Finacial Advisor Talia.
Having just bought a house, Jonathon put the money into his bond, safe in the knowledge that he still has the annuity to preserve his remaining capital and look after his wife should anything unforeseen happen to him.
Talia notes that the moral of the story is to save for your future when you are young and then to ensure that you continue to pay your premiums throughout the life of your policy. “Jonathon is an accountant by trade and he disciplined himself to pay the RA premiums every year. He should thank his mother for making a hugely valuable investment on his behalf while he was still young.”
While Jonathon was fortunate that his money performed particularly well over the 31 years that it was invested, Ebrahim advises anyone with an RA policy to review their policy regularly to stay abreast of inflation, and to increase their premiums annually wherever possible. Also ensure that you are aware of the costs of your actions, he adds: “Be careful of transferring your policies from one company to another for what seem like better returns as you can lose as much as 20% of the value of your investment in penalties. Always check what the costs are of making a change, before you actually go ahead.”
TIP: Don't think that you will spend less money when you are retired than you do now. Research has shown that people spend just as much money after retirement as they do before retirement. This means that your savings and investment goals for retirement should provide earnings that match your current income.
*not his real name