Saving or investing for your retirement – what are the options?

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Many people like to enjoy themselves after retirement. To some, retirement means more freedom to explore their interests but how many can afford a good life after retirement? The key to this is saving or investing for your retirement – what are the options available?

Life stages

Age is one of the things we can never deceive, being young today does not mean you will not get old in the future. Life has three main stages that are very important. These are:

• Learning stage
• Momentum Stage
• Stability stage

The first stage is when you are trying many things so that you can figure out your passion or call. At this stage, you may not be sure of what you want to do or who you are. This is the stage where you lay the foundation of your life. Most folks are not worried about investing or saving in this stage and this will normally backfire at later stages. This is the stage you are supposed to take more risky investments because time is on your side.

Important article: Is age just a number on wealth creation?

Moreover, the momentum stage is when you make a lot of progress in the life you have chosen in the first stage. This is the stage where money will pass through your hands more often and expenses will also increase. At this stage, everything grows fast whether it is your family or your responsibilities at work. The problem with this stage is that everything moves fast whether its success or failure. You need to make few mistakes in this stage because the impact of every move is massive.

Stability stage is when everything have cooled down. At this stage, you are either poor or wealthy. Life is more predictable on this stage. This is the stage everyone wish to be but unfortunately, you have to pass through the first two stages first. In this stage, you are supposed to take more secure investments so that you will have enough for your retirement.

The options available for retirement

Depending on whether you want to retire early or not, there are several options you can follow. We will first discuss the following three common retirement options:

1. Pension fund
2. Provident fund
3. Retirement Annuities

Pension Fund

When you are employed on full time basis permanently by a company, both you and your employer can make contributions towards your retirement. The trustees of the pension fund will determine the financial assets to invest in on your behalf. The rule in South Africa is that when you retire, you can withdraw a maximum of 1/3 of the money in your pension fund as a lump sum and use the extra 2/3 to buy an annuity.

In the condition that you resign from your company you can do the following:

• withdraw the funds as a cash payout,
• transfer your money to your new company’s retirement fund or
• move your savings to a Retirement Annuity fund.

Key note: You are liable for tax when you access the money from your pension fund.

Provident Fund

In the South African context, a provident fund is more similar to a pension fund (In the few years to come, the benefits from a provident fund will be more or less the same as a pension fund). The main difference between a pension fund and a provident fund is how you access your funds at retirement.

A Provident fund gives you the comfort to withdraw all your funds as a lump sum at retirement. You can also choose to buy an annuity at retirement if you wish.

In addition, just like a Pension fund, if you change your employer, you can have a cash payout or transfer your money to a Retirement annuity fund or another form of Preservative fund.

Key note: If an employer is offering you to choose between a Pension fund or a Provident fund, you may need to consult a professional expert because the tax implications between the two funds differs.

Retirement Annuity fund

A Retirement Annuity offers you with a chance to save for your retirement but it has nothing to do with your employer. You make your own monthly contributions. The benefits at retirement for your Retirement Annuity are similar to your Pension fund. Since a Retirement Annuity is not linked to your employer, changing employers does not change the conditions of your Retirement Annuity fund.

Key note: You have limited access to your Retirement Annuity fund before retirement and even at retirement, you cannot withdraw the full amount as a lump sum.

Alternative saving or investing for retirement options

The retirement funds from the Provident fund and the Pension fund may not be enough to cater for your needs after retirement. For those people who want to retire early, you may need alternative options to invest for your retirement. You can invest in the following:

• Unit trusts
• Exchange Traded Funds (ETF)
• Shares
• Government and retail bonds
• Real Estate

The advantage of these investment options is that, you can choose whatever asset that matches your risk appetite. For someone who do not have a good understanding of the investment world, unit trusts are the best because they are managed by a fund manager. The good news is that you can invest in shares or bonds via a unit trust.

You can check what Allan Gray is offering as a start or you can also have a look at other investment managers like Old Mutual (in South Africa the choice is unlimited).

For more information about unit trusts, shares and real estate, you can read the following articles:

• First time investing – how and what to invest in.
• A closer look on how to invest in property.
• Buying and selling stocks.
• Investing in shares – understand the basics.
• The effect of time on the stock market.

So the big question to ask is:

Can I have both a Provident fund (or a Pension Fund) together with another investment like government bonds?

Yes. If you have a Provident fund, then you are not stressed about having nothing at retirement. This can allow you to invest in high risk assets like shares. If you are thinking of retiring early, the only option you have is investing. Otherwise if you depend on the Provident fund only, there is a risk that you may not have enough money at retirement.

Summary points

• Understand that there are three stages of life which are the learning stage, momentum stage and stability stage.
• Invest early in life (during the learning stage) so that you will have enough for your retirement.
• There are three common retirement options which are Pension fund, Provident fund as well as Retirement Annuity fund.
• If you want to retire early or to have enough money at retirement, invest your money in real estate, ETFs, unit trusts, shares or government bonds.