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Saving for retirement

Follow these seven simple, tried and tested rules to improve your retirement income

1. Have a plan 

As the saying goes, if you fail to plan, you plan to fail. You can start your plan by setting a goal. It may be easier than you think. Ultimately, you are responsible for your own retirement income, so if you don't already have a retirement plan, you need to put one in place urgently. 

2. Start early and work for longer 

When you are young, the thought of retirement seems very far removed from your everyday life, but saving for retirement happens over a long period, 30 or 40 years. The sooner you start, the better your outcome will be because time enables the power of compounding to grow your savings. According to Albert Einstein, compound interest is the 8th wonder of the world. 

But how you can catch up if you start saving late?

  • Increase your contributions by saving more of your monthly income
  • Delay your retirement if possible
  • Increase your investment return if possible - but remember your investment risk will also increase
  • Pay off your debt before you retire

3. Save enough 

How much is enough? The answer depends on your retirement goals and when you start saving. If you start at age 25 and save until retiring at age 65, you should contribute at least 13.5% of your gross income to your retirement savings each year. It is simple - the more you save, the more money you'll have in retirement. But did you know that you can increase your retirement contributions AND pay less tax? Because of the tax-deductibility of retirement savings, increasing your contributions may have a relatively small influence on your take-home pay.

How can you save more?

  • Increase your regular monthly retirement fund contributions
  • Make additional voluntary contributions when you have a little money to spare
  • Save in a retirement annuity (RA), which offers extensive tax benefits and protects your savings until retirement
  • Take out a Tax-free savings account, which also offers tax benefits and is more flexible than an RA

4. Manage your investment risk/returns 

All investments carry some risk. While you should take enough risk to grow your money while you are saving, you must not put your accumulated capital at risk when you are close to retirement. Read more on investments

5. Manage costs 

Costs eat away at your savings, so the higher the costs of your investment choices, the less money you will have to save to achieve your goals. What kinds of costs should you be paying and what level of cost is 'normal' when it comes to saving for retirement. 

How much should you expect to pay?

Costs vary widely and depend on various factors, such as the portfolio you invest in and how much you have invested. The good news is that saving inside a retirement fund is usually the most cost-effective method, with costs between 1% – 2% of assets per annum. Saving outside a retirement fund is more expensive, and costs can be 2% – 4% or more of assets per annum. 

6. Preserve your retirement savings 

Taking your savings in cash when you change jobs is tempting, but doing that could mean that you may have to pay tax on the cash you take at that time.  Remember that the money you save in your retirement fund is meant to be used for your income in retirement.  If you use it when you change jobs, before retirement, it could have a seriously negative effect on your standard of living in retirement. 

7. Pay off your debt 

If you have debt, it is advisable that you pay off all your debt while you are still earning an income. Although this should happen independently of your retirement plan, it will put you in a much better position after retirement and take away unnecessary financial strain.

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