Many people dream of retiring early and enjoying their golden years without the stress of work. But how do you plan your retirement if you want to stop working at 51, but access your funds only at 61? This is a question that one of our readers asked us, and we have some tips and advice for him.
Transfer your retirement fund to a preservation fund or a retirement annuity
If you have a pension or provident fund with your employer, you can transfer it to a preservation fund or a retirement annuity (RA) when you retire at 51. This is a tax-neutral transfer, which means you won’t pay any tax on the amount you move. However, there are some differences between these two options:
- A preservation fund allows you to make one withdrawal before retirement, but you can’t make any additional contributions. This can be useful if you need some cash for emergencies or expenses before you turn 61.
- A RA allows you to make additional contributions, but you can’t withdraw any money before you turn 55. This can help you grow your capital and benefit from tax deductions on your contributions.
You can choose the option that suits your needs and preferences, but remember that both of them have fees and charges that may affect your returns. You should also diversify your portfolio and invest in different asset classes, such as equities, bonds, property, and cash, to reduce your risk and increase your potential returns.
Consider implementing a retirement income plan at 55
When you reach 55, you will have access to your retirement funds and be able to convert them into a retirement income plan. This means that you will use part or all of your savings to buy an annuity that will pay you a regular income for the rest of your life. There are different types of annuities, such as:
- A life annuity, which guarantees you a fixed or inflation-linked income for life, but has no residual value for your beneficiaries.
- A living annuity, which allows you to choose your income level and investment strategy, but has no guarantee of sustainability or growth.
- A hybrid annuity, which combines the features of both life and living annuities, but may have higher costs and complexity.
You don’t have to implement a retirement income plan at 55 if you don’t need the income or want to preserve your capital. However, it may be tax-efficient to do so and withdraw an income that is under the tax threshold. This way, you can avoid paying tax on your lump sum withdrawal at 61 and reduce your taxable income in retirement.
Estimate how much your funds will be worth in 10 years
If you want to know how much your funds will be worth in 10 years, you need to consider two factors: the amount of money you have now and the rate of return you expect to earn on your investments. You can use the following formula to calculate the future value of your funds:
FV = PV x (1 + r)^n
Where:
- FV is the future value of your funds
- PV is the present value of your funds
- r is the annual rate of return
- n is the number of years
For example, if you have R2.5 million now and expect to earn an average annual return of 8%, your funds will be worth:
FV = R2.5 million x (1 + 0.08)^10 FV = R2.5 million x 2.16 FV = R5.4 million
This is an estimate based on some assumptions and does not take into account inflation, fees, taxes, or market fluctuations. You should also be aware that past performance is not an indicator of future results and that higher returns come with higher risks.
Seek professional advice from a qualified financial planner
Planning your retirement is not an easy task and requires careful consideration of various factors, such as your goals, needs, risk appetite, time horizon, and lifestyle. Therefore, it is advisable to seek professional advice from a qualified financial planner who can help you design a retirement plan that suits your unique situation and circumstances.
A financial planner can help you:
- Assess your current financial position and future income needs
- Choose the best investment vehicles and strategies for your retirement savings
- Optimize your tax efficiency and estate planning
- Review and monitor your retirement plan regularly and make adjustments as needed
You can find a list of registered financial planners on Moneyweb’s website or use their Ask a Question feature to get answers from experts.
