Deciding Between Continuing Work and Early Retirement: Finding the Right Path for You
According to the 2023/2024 Retirement Reality report, it is concerning that merely 6% of individuals have adequately prepared for retirement. This highlights the importance of analyzing how factors such as working longer can influence your readiness for retirement.
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What impact does an additional year have?
You may be surprised by the significant effect that just one more year of work can have on your retirement plans.
Firstly, you continue to contribute to your retirement savings. For instance, if you earn R80 000 monthly and save 15% for retirement, that amounts to an additional R144 000 saved over the year – and this is before considering your employer’s contributions or the tax benefits.
Moreover, the advantages are twofold. Working an additional year not only results in more savings but also reduces the time you will need to rely on these savings.
Let’s illustrate this with specific figures:
Imagine you are aiming for R50 000 monthly from your retirement savings to sustain your lifestyle. With a 5% annual drawdown, you would require approximately R12 million saved to maintain that for 20+ years of retirement. By working just one additional year, you can shorten your retirement span while allowing your current savings more time to grow.
Speaking of growth, your savings can significantly benefit from that extra year. A portfolio of R5 million that grows at 6% above inflation could add around R300 000 to your retirement fund – without you making any additional contributions. This could cover several months’ worth of retirement expenses.*
* For simplicity, this hypothetical example does not account for potential market volatility, variations in returns, fees, or taxes, and assumes consistent withdrawal and inflation rates.
A straightforward truth about expenses
Every rand you cut from your monthly expenses essentially doubles in significance for retirement planning. How is that possible? Consider you are investing in a low-cost, high-performance living annuity and wish to withdraw a sustainable income from it.
Additionally, there is another perk: When you withdraw less from your living annuity, you don’t just conserve more of your capital – you’re likely also saving on taxes. Keep in mind, you pay income tax on whatever you withdraw from your living annuity. Drawing R30 000 monthly instead of R35 000 can lead to substantial tax savings over time – funds that remain invested, working for you in retirement.
The crucial impact of investment fees
While it’s vital to manage your daily expenses, there’s another cost that can dramatically affect both your retirement timing and how long your funds will last: investment fees. The distinction between paying 1% versus 2% or 3% in annual fees may seem minor, but it can have significant consequences for your retirement.
Consider a practical scenario: Suppose you have R6 million in retirement savings and require R25 000 monthly income. With investment fees at 1% or lower, you could feasibly achieve this with a 5% drawdown rate. However, with 2% in fees, you would need to decrease your drawdown rate to 4% to generate the same income confidently while ensuring your savings last throughout retirement. This adjustment means you’d need R7.5 million instead of R6 million in savings – an additional R1.5 million just to offset higher fees.
This difference in fees could lead to:
- Working several more years to accumulate an additional R1.5 million; or
- Reducing your monthly retirement income by R5 000 to maintain a sustainable drawdown rate.
In essence, investing with lower fees could potentially allow you to retire earlier, withdraw the same income from a smaller retirement portfolio, or keep your withdrawal rate lower to ensure your funds last longer.
Our Living Annuity Calculator clearly illustrates this: lower fees result in more of your investment returns remaining invested and compounding over time instead of being depleted by costs. This can be the deciding factor between retiring now or needing to work for several additional years to shore up savings.
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You don’t have to opt for all or nothing
Retirement doesn’t need to be an all-or-nothing choice. Numerous South Africans are creatively blending various income sources as they shift into retirement.
Consider rental properties. Earning R8 000 monthly from a rental property might initially seem insignificant, but it can greatly influence how much you need to withdraw from your retirement savings. Alternatively, consider using your skills for consulting work – earning R10 000 a month from occasional gigs means R120 000 less you need to draw from your retirement fund each year.
Making prudent lifestyle adjustments
Not every expense reduction necessitates a major sacrifice.
In fact, many retirement changes can lead to naturally lower costs:
- Housing typically represents the most significant expense during retirement. Downsizing to a smaller residence or relocating to a more affordable area can markedly decrease monthly costs while allowing you to release capital from the sale of your property.
- Transportation expenses generally decline in retirement. Without a daily commute, many retirees find they can manage with a single vehicle instead of two, or transition to a more fuel-efficient car.
- Leisure and dining habits usually adjust. Many retirees discover they spend less while enjoying more life experiences, as they have the time to plan and prepare meals at home or partake in entertainment during non-peak hours.
Finding your equilibrium
The decision regarding when to retire relies on balancing several vital factors: your savings level, expenditures, ability to generate additional income, and personal situations. While working longer can enhance your financial standing, effective expense management and additional income streams may enable you to retire sooner than anticipated.
Consider these essential steps:
- Calculate your essential monthly expenses;
- Assess opportunities for expense reduction;
- Investigate potential additional income sources; and
- Utilize our Living Annuity Calculator to evaluate how much income you can sustainably withdraw from your retirement savings.
Retirement planning isn’t solely about reaching a specific savings target – it’s about creating a sustainable financial strategy tailored to your unique circumstances. Whether you decide to work longer, cut expenses, develop extra income avenues, or blend these methods, understanding their relative impacts will guide you in making the best choices for your future. Engage with us if you would like to explore additional options for your retirement investments.
10X Investments is a licensed Financial Services Provider (FSP). The 10X Living Annuity is underwritten by Guardrisk Life Limited. This article should not be construed as financial advice.
10X Investments provides a variety of investment options directly to the public accessible via the My10X investor portal online at www.10x.co.za, through corporate pension funds, and via your financial advisor.
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