94% of South Africans face retirement income shortfall

July is National Savings Month and one of the initiatives conducted to raise awareness of the importance of saving has been Old Mutual’s Savings Monitor.

Not surprisingly, the results of this survey show that over the last few decades, South Africans are saving less and have more debt.

This tendency to ignore future planning – most importantly, retirement planning – will result in 94% of people having to accept drastically lower standards of living in retirement and, in many cases, rely on the financial support of others.

The study revealed that in order to retire at 75% of your working income, one would need to save 30% of one’s income during their working life.

At best, the average employee with a retirement fund is putting away about 13.5% of their salary for retirement.

South African’s face a plethora of price increases, not the least of which include rising electricity costs, fuel costs, municipal rates and highway tolls (highway robbery?)

Under this kind of pressure, savings easily takes a back seat. But the reality is that rising costs only highlight the need for a really serious commitment to saving for retirement starting now.

If you are not absolutely sure that your retirement plans are realistically going to meet your retirement needs, it’s time to face up to the numbers.

Let’s prepare retirement projections that will help you take an informed view of your retirement situation.

To take this to the next step, email me and I’ll let you know what information will be needed to proceed and we’ll work through the process together.

To see the Old Mutual Savings Monitor visit: http://www.oldmutual.co.za/personal/financial-planning/old-mutual-savings-monitor.aspx

Cover for severe illnesses

Last week I sent a message about Critical Illness Cover. This week I’m showing you a list of the conditions covered by this insurance.

Although the conditions most claims are paid for are cancer and heart disease, a wide range of other illnesses are covered that could impact you financially due to lost income or very high medical expenses and/or lifestyle adjustments.

Have alook at the list of conditions in the table and diagram below; the table shows the broad caategories of conditions covered and the diagram shows how the product approaches paying a claim:

Momentum’s critical illness cover is available as follows:

1. Comprehensive Critical Illness: pays either 25%, 50%, 75% or 100% of the insured amount depending on the severity of the condition claimed for.

2. Comprehensive Critical Illness Plus: pays for certain illnesses of lesser severity and as a result, smaller claim percentages are payable in addition to the larger amounts described above. (see plus option in the diagram)

3. Elevated: Both the above options can be made ‘elevated’. This boosts claims that would have qualified for a 50%, 75% payout to 100% - ensuring maximum payouts are realised more easily.

You can select from the four options of cover that result to ensure your personal circumstances are properly insured.

This benefit can also be structured to provide cover either to age 65 or for “whole of life”.

The cost of Critical Illness

Did you know that one in four white South Africans get cancer?

Add that to heart attacks, strokes and the long list of other critical illnesses out there, and one wonders why only one in ten policies have critical illness cover included.

What is critical Illness cover? – Insurance that pays a lump sum on diagnosis of many serious illnesses.

Why do you need it? – The cost of a critical illness can impact your lifestyle dramatically, not only medical costs, but lost income and additional expenses:

• Your hospital bills may not be fully covered (have a look at the sub limits)

• Your day-to-day costs may eat away your savings

• Some chronic medication is not covered by the prescribed minimum benefits

• Besides shortfalls, advancing medicine may mean new cutting edge treatments that your medical aid has not approved – so critical illness cover buys you choice.

• Where a condition results from overwork or stress, less work time can mean less income and extra cash helps you take the time you need.

• You may need recovery time in excess of your sick leave and not qualify for disability payout. Your critical Illness cover makes this possible.

• If you need prosthetics, most medical aids have minimal cover for these.

I’d like to help you put the right type and amount of critical illness cover in place.

2011/12 Budget Highlights

The recent national budget speech announced a number of interesting changes to taxation.

• TRANSFER DUTY ON FIXED PROPERTY PURCHASES will now only kick in from R600 000 (Previously R500 000) at 3% and escalate in a tiered structure where the amount over R1m will be taxed at 5%, amounts over R1,5 at 8%. Legal persons will now be subjected to the same tiered transfer duty as natural persons (previously taxed at a flat rate of 8%)

• Tax free portion of LUMP SUMS AT RETIREMENT has been increased (Hopefully this will happen regularly to offset the effect of inflation)

• An additional tax rebate has been introduced for taxpayers 75 years old and over.

• The new dividends tax effectively brings to an end the usefulness of the so called “dividend yield” unit trusts.

From 1 March 2012, employers’ contributions to retirement funds will be regarded as a taxable fringe benefit. Employees will be allowed to deduct contributions of up to 22.5% of their taxable income to retirement funds, up to a maximum limit of R200000 per annum. This limits the deductions allowable for higher earners.

Lump sum withdrawals from provident funds will be limited to one third (Same as RA’s and pension funds)

Estate duty is being considered for review/elimination as it is not a cost effective tax.

I trust you have found this brief outline useful – please be in touch if you’d like any further information.

Don't rob the elderly

When changing jobs, it can be really tempting to cash in your retirement fund to help settle some debt or buy that expensive something special you really need. When looking at the kind of numbers your forward-planning says you need to retire, even a healthy sum in your retirement fund can look rather puny and you may think it won’t hurt to redirect the funds to a “clear and present” need. But as with all decisions, one needs to weigh up the pro’s and cons before blundering ahead.

Take a thirty year old person, who has resigned a job and has R100 000 accumulated in the company retirement fund. If that amount was “preserved” (kept in a retirement-funding investment) it would grow to around R2 041 396 by the time our investor reached sixty-five years of age. (using a set of assumptions kept consistent throughout this example). You say, “But inflation means that amount is not as big as it looks”. You’d be right, so if I strip out the effect of inflation, the “today’s money” value of the R100 000 at age sixty-five is R265 496 – way more than double the value it is now.

Of course, if you cash the fund in now, you’ll be taxed about R13 950, So you only get R86 050 out. That means that to get R86 050 you have exchanged R265 596 – not good business at all.

So what about saving a little extra each month to make up the shortfall. You’d need to add R752 to whatever you normally would have to save – if you add that up over the years it comes to R315 840 extra. Ouch.

The moral of the story is that it is of paramount importance to keep a long term view when it comes to retirement funding. It’s enough of a challenge accumulating the capital you need, without raiding that fund along the way –essentially, robbing an “older you” of a much needed income.

A carefully crafted retirement plan is essential to set up, follow and monitor if a financially secure old age is to be achieved – the trick is to get started and keep going.

Will you have enough to invest in their passion?

Opportunity costs money. Great opportunity often costs a lot of money.

A commitment to investing smartly now means you can see your child's potential fulfilled. Now that's what parents are for.

How much to invest?

That will depend on the kind of plans you are preparing for. For example, if you are planning to fund a four year degree that costs R40 000 per year now and your child is new born, an investment of around R1100 escalating at 6% per year should cover the cost of the degree when the time comes.

Having the cash available in advance when it is needed is far better than needing to borrow the money or to cut back on lifestyle expenses to squeeze through the university years. And it's a huge advantage to your child to start his or her career without the burden of a student loan.

What investment vehicle should you use?

You need something that can adapt to changing plans. Avoid the "Education Plans" in the retail market - these are nothing more than endowment policies with a new label. They are generally expensive and not very flexible.

Get a qualified financial advisor to put an investment together for you using unit trusts. This will allow you to tailor the risk/return profile, cut costs and have an investment that can allow changes in contribution, additional lump sums, full or partial withdrawals and temporary stoppage of payment - all without penalty costs or other drama.

Investing for your child's future is not expensive...it's priceless.

You should never tell a child their dreams are unlikely or outlandish. Few things are more humiliating, and what a tragedy it would be if they believed it.

Rita Ghatourey

The Miracle of Compound Interest

Last week I illustrated the impact of delaying retirement savings. So now, have a look at the upside of getting started sooner rather than later.
Case Study:
Peter invests R1000 at the beginning of each year for 10 years running at a return of 10% per annum, then he stops contributing but leaves the funds accumulated so far in the investment to continue growing.

At the beginning of the following year ( Year 11 – on our time-line) Paul, Peter's twin brother starts investing R1000 at the beginning of each year at 10%. He does this for the next 30 years.

This means Peter has invested a total of R10 000 over 10 years & Paul has invested a total of R30 000 over 30 years.

Who has accumulated the most money in their investment?

Peter has R305 908

Paul has R180 943

The difference? Compound growth and time.

What is procrastinating costing you? Getting started is the most important part of investing.

Have an awesome week.

Procrastination's Pricetag (Something for you to read later)

Have a look at this shocking case study showing why you need to make sure you start doing something about providing for retirement today.

Imagine you are 25 years old and you earn R10 000 per month. You want to make sure that you retire at age 65 at the same standard of living you enjoy now - so you need the same income, just adjusted for inflation.

You intend to invest monthly and increase your investment contributions in line with your salary inflation increments. You have so many expenses, you wonder if it's sensible to delay investing until you are in a better financial position.

So you call me and I show you what you'll need to do to make up for lost time:

• At 25, you're earning R10 000, you have 40 years to save and you need to save R1853 per month (18% of earnings)
• At 35 you're earning R21 589, you have 30 years to save and you need to save R6644 per month (31% of earnings)
• At 45 you're earning R46 609, you have 20 years to save and you need to save R26 517 per month (57% of earnings)
• At 55 you're earning R100 626, you have 10 years to go and you need to save R139 608 per month (139% of earnings)...

...so you cancel your retirement and start taking lots of vitamins 'cos you're gonna need put in an extra few years of hard work.

Coming soon - the power of starting sooner rather than later.