There is a saying that you can never have enough money, but can you ensure that you will ever have enough money in retirement?
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 and R36 000 TFSA allowance is 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.”
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Understand the potential in every rand you save and get tax-free
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. 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.”
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Avoid biases when saving for retirement and keep it tax free
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.”
He explains that present bias causes us to prioritise today’s consumption over tomorrow’s security, making it difficult to maintain disciplined savings habits. “Overconfidence often drives investors to trade excessively, concentrate portfolios unwisely, or time markets with false precision.
“Regret aversion causes us to hold losing positions too long or sell winning positions too early, losing wealth through inaction or mistimed action.”
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Inability to imagine your future self
However, Pask warns, perhaps the most dangerous bias is what economists call our ‘defective telescope’, which is our inability to accurately imagine our future selves. “We cannot viscerally feel what it’s like to be 70 with insufficient income.
“This psychological blind spot causes investors to under-save systematically, then over-conserve once retired and often die with substantial unspent wealth that could have funded a richer life.”
Pask says it is good to start with the end in mind. “Start with deliberate reflection on your actual retirement needs. Consider the lifestyle you want, what it will cost (accounting for inflation) and how long might you live. Then work backwards to understand what action will be required to reach these goals.”
He warns that this exercise often reveals uncomfortable truths. “You may need to save more, work longer, or adjust expectations. But confronting reality early gives you options. Discovering the shortfall at 64 gives you none.
“Retirement is fundamentally an investment issue. The discipline of maximising your RA and TFSA deductions is essential, but it operates in support of a larger goal: deploying capital wisely to generate the returns necessary for a comfortable retirement. The combination of tax discipline, investment discipline and spending discipline will help you make the most of your retirement plan.”
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Avoid paying too much tax
Martin Riekert, chief commercial officer of Momentum Investments points out that you could also avoid paying too much tax by being tax-savvy. “Most financial decisions you make have a tax impact. Although tax can be complicated, with a few smart moves with your financial adviser, you can benefit significantly from tax incentives, especially when planning for retirement.
“In the process, you can also improve the probability of achieving your investment goals. You can provide for your retirement and be tax-savvy by using a retirement fund and a tax-free investment, also known as a tax-free savings account.”
He also says it is a good idea to top up your retirement annuity now. “Every tax year, you can claim a tax deduction for the money you invest in a retirement fund. To make the most of this deduction, you can invest up to 27.5% of your taxable income or salary before any deductions are made, whichever is higher, subject to a maximum of R350 000.
“You can do this whether you are self-employed or earning a salary but not yet contributing the full amount to your employer’s retirement fund.”
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You can still add a lump sum before the end of the tax year
Riekert points out that if you have not yet used the full tax deduction available to you for the year, you can make an additional lump sum payment to your retirement annuity before the tax year ends on 28 February 2025.
“In addition to the tax break you get on the money you invest, you also enjoy tax-free growth in your retirement fund. You do not pay income tax, dividends tax or capital gains tax while the money is growing.
“If you have not yet maximised the 27.5% benefit with your regular contributions, you can add a lump sum to your retirement annuity before 28 February 2026.”
You can also top up your tax-free investment. Riekert says although you do not get a tax deduction for money you invest in a tax-free investment, you still enjoy tax-free growth. “And you will not pay any tax on the proceeds when you decide to take money out of the investment.”
He says you can invest up to R36 000 each tax year in a tax-free investment, with a lifetime limit of R500 000. “The secret is to use these tax incentives optimally each year and consistently over time. By doing this, you can reduce the impact of tax on your financial plan and increase the growth potential of your investments.
“Discuss your options with your financial adviser so that you can reap the full benefits of tax incentives available to all taxpayers every year,” Riekert says.
