Check your retirement is on track

Do you know what pension you are likely to receive in retirement? If not, regardless of how young you are, how young you feel or how far off you think you retirement years still are, a must-do for 2017 should be to find out what pension your savings can provide or what they are likely to provide if you continue your current savings.

The younger you are when you find out that you are not on track, the better your chances of setting yourself up for a comfortable retirement. A small increase in the amount you save over a long time, or change to a lower-cost retirement savings product, could make a very big difference to the pension on which you retire.

Typically, if you are saving for your retirement through a company pension or provident fund or through a retirement annuity, you will regularly receive a statement showing the lump sum you have saved.

But you need to know what that lump sum will provide by way of a pension at retirement.

If you have a more pro-active retirement fund, it may be showing you what is known as your replacement ratio – the percentage of your salary that your savings will provide as an income.

But be careful about the numbers you are quoted because your replacement ratio may be based on your pensionable salary and not your total cost to company and this may be as little as 80 percent of your pay package.

Retirement fund contributions are often based on what is known as pensionable earnings, or retirement-funding income, which typically excludes bonuses, allowances for travel or cellphones, as well as overtime payments.

Many retirement funds allow you as a member to adjust your pensionable income relative to your non-pensionable income in order to increase their take-home pay.

Funds typically aim to provide anything between 60 to 80 percent of your income as a pension.

If your fund states that it aims to provide a pension that replaces 75 percent of your income but that income is based on your pensionable earnings which are only 80 percent of your total pay, your retirement income target will essentially be only 75 percent of 80 percent of your total package, which can result in a big drop in income at retirement.

The targeted pension of 75 percent of your income is expected to be enough for you if you have paid off your debts such as your home loan and your children have left home, but many pensioners find they are not in this position and you should realistically assess your own situation, especially if you are closer to retirement and the odds of being debt-free and having only a spouse as a dependent are unlikely.

Working out what your lump sum will provide as an income is not that easy. At retirement you will have to choose between a guaranteed annuity – that provides a predetermined income for life – or a living annuity – in which you decide the underlying investments and take the risk that your investments can provide the income you require for the rest of your life.

If you are close to retirement you can get quotes from the companies that provide guaranteed annuities, such as Old Mutual, Sanlam, Discovery Life, Momentum, Liberty, Paramount Life and Just Retirement.

 Or you can use the guidelines used for people who have living annuities. A common guideline used is that you should not draw more than four percent of your income as an annuity annually. So for every R1 million, you can draw R40 000 a year or R3 333 a month. Guidelines put out by the Association of Savings and Investments show what percentage pension you can draw at different ages and different investment returns – the older you are and the higher your investment return, the more you can draw: https://www.asisa.org.za/asisadocs/living-annuity-standard.pdf

If you want a rough idea of what income your retirement lump sum and future savings will provide, you can try Sanlam or 10x’s retirement calculators: https://app.sanlam.co.za/ppr/Calculator#adjustments and  http://10x.co.za/retirement-tools/pre-retirement/

Take the boredom out of budgeting

Many a new year has doubtless begun with a resolution to stick to a budget and it is a good resolution to make. But probably one that many of you have made and quickly broken. That is because many people draw up budgets that involve cutting the things they like doing. Late last year, we reported on a behavioural economist who believes there is a way to budget without it being an exercise in austerity. If you missed our article last year read it here: http://www.iol.co.za/personal-finance/financial-planning/new-way-to-budget-find-a-strategy-to-meet-your-needs-2091440

And if drawing up and tracking a budget sounds like way too much admin, try one of the online personal financial management tools such as 22seven (www.22seven.co.za) or one of those offered by your bank.