It is time to review your retirement planning and to ensure that you use all your tax benefits, even if they are not enough. Listening to the experts, it seems a bit like a game of give and take, although the tax man will always take his portion. Adriaan Pask, CIO at PSG Wealth, says as we approach the tax year-end at the end of February, many South Africans will be planning to top up their retirement annuities (RAs) and tax-free savings accounts (TFSAs).
“The discipline of maximising your annual R350 000 RA deduction limit andR36 000 TFSA allowanceis the ideal foundation of a tax-efficient retirement plan. However, these important vehicles should be enhanced by equally disciplined broader savings and investment decisions to ensure you build the amount of retirement funds you will actually need.” For example, he says, if you earn an income that is enough to allow you to reach your RA and TFSA contribution annual limits, you would have contributed around R386 000 per year. “This is ideal, but even if you start doing this at a young age and continue doing so for 40 years, research shows that it will be insufficient to sustainably replace even 50% of your current income at retirement.” That sounds daunting, but Pask says you must understand how your money works as well as the latent potential of every rand.
“When we talk about long-term retirement planning, we must fundamentally reframe the way we think about money. “Every rand you hold contains latent potential: R1 000 today will not be worth R1 000 in the future. For example, if you invested at a reasonable annual rate of return of 10%, that R1 000 will grow to R6 727 in 20 years.
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Therefore, the true cost of spending that R1 000 wastefully is not R1 000 but R5 727 in foregone future wealth.” He says this perspective transforms how we should evaluate financial decisions. “Consider, for example, spending R60 000 on a holiday. On the surface, you spend R60 000 today for a holiday, but the picture changes when viewed through a long-term investment lens.
“If you invested that same R60 000 for 20 years at an annual rate of return of 10%, it would grow to over R400 000. Therefore, the real cost of your holiday is not R60 000 now but over R400 000 that could have been added to your retirement savings.” As life happens, incurring certain costs is unavoidable, but wasteful expenditure can be avoided. Pask says it is not simply about consuming today’s money.
It systematically steals from tomorrow’s security. As such, delayed gratification can be a powerful wealth creation tool. He warns that cognitive biases can affect your retirement strategy.
“Even the most sophisticated investors fall prey to behavioural biases that undermine their retirement outcomes. Research consistently shows that cognitive biases – particularly overconfidence, present bias and regret aversion – lead to poor retirement decisions.”
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