Posted by: Kapil | 2013/07/02 09:40

What is the best mix of retirement investments?

My dad is retiring soon and has shown me his numbers after retirement and, wow, I want to be in the same situation as him. I earn 30 000 per month as a salary. I contribute to a medical aid and provident fund.7.5% from me and 11% from my employer. What should I be doing to receive 100% of my salary when I retire in 30 yrs time. Also what is the difference between Pension and provident fund and what about a retirement annuity? What is the best mix of retirement investments?

expert answer

Posted by: Craig Aitchison | 2013/07/03 09:15
Hi Kapil, I am glad to hear that your Dad is looking forward to a financial secure retirement. There are a few different questions there so I am going to take them one by one.

How to get 100% of salary in retirement?
The secret to a comfortable pension in retirement doesn't start with your mix of investments! The best way to ensure a good retirement is to start as early as possible, and save as much as possible. A financial planner can sit with you and help you estimate how much you would need to save a month for retirement, in order to reach your goal of 100% income in retirement, based on your particular circumstances, such as your existing provident fund.

The investment mix is still very important, and if you have 30 years before retirement you should look to maximise investments in growth assets, such as equities and properties. This means you would target investments that are characterised as high risk and high returns. 

Remember, these investments will have some years of high returns, and some years of very low returns, but over 30 years, the good years far outweigh the bad and give you the best chance of getting good growth on your retirement savings.

What is the difference between a pension fund, provident fund and retirement annuity?

From what you mentioned, you are a member of provident fund. Pension and provident funds are retirement funds that you can only belong to through your employer. The employer and yourself then contribute to the fund at a fixed amount. 

A pension fund differs from a provident in a number of ways, but the most important is that when you retire from a pension fund, you must convert at least two thirds of your retirement benefit into a monthly income (or pension). If you retire from a provident fund, however, you can take your whole retirement benefit as a lump sum, with no obligation to convert into an income.
That may sound attractive, but a pension fund allows you to receive tax deductions on your contributions when you make them, while a provident fund only allows those deductions when you retire, meaning your tax benefits are deferred.

A retirement annuity is a retirement fund that you can join as an individual, in your own name. You will receive a policy in your name, and you can choose how much you contribute to the retirement annuity each month. Savings you make in a retirement annuity can be accessed after age 55, and when you retire you will need to convert at least two thirds of the savings into a monthly income. 

All the best with your retirement planning! 

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers, and disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site.

user comments

Posted by: segale | 2013/10/23 19:31
I like RC's input but would add that one can also add 'Arrear contribution" equivalent to R1800 pa to your occupational pension, which would amount to R150 pm and is tax deductible.
Reply to segale
Posted by: Wendy Webb | 2013/09/16 17:24
Craig ignored one very important point. The writer says he is 30 YEARS from retirement. By the time he retires he will be able to take only one third of a provident fund in cash. This is coming into effect within the next couple of years.
Reply to Wendy Webb
Posted by: RC | 2013/07/09 23:16
Good question! I agree with the response...equities will give you long-term the same but with more annual interest/cashflow which serves as a bonus and buffer during market drops. I would have 3 products if I were you. In terms of Retirement vehicles you can go the Policy route or Pure Unit Trust Investment (PUTI) route. Policies attract penalties if you deviate from the contract. PUTI RA's are flexible with no penalties at all but also no risk benefits. A good aspect about the Policy based is that you can add on Disability waivers and Retrenchment waivers for difficult times where I do want some protection. You also obviously get PUTI's that are not RA's, and are normal flexible investments. So I said 3 products. I would have all three of the above-mentioned. I would contribute monthly to each. So then have 2 RA's going and getting the tax deductions - eventhough one is a PUTI and the other is a Policy. Then have a normal PUTI going. If I get into financial dwang I can then stop the PUTI RA and normal PUTI monthly debits, so that I am always sure to be able to keep the Policy one going as otherwise that will attract penalties - and can even use whatever I have saved in the normal PUTI to fund the Policy one if really stretched. Either way, if the above worst case never happens, I have a normal PUTI I can access anytime, a flexible no-penalty PUTI RA and then a Policy RA that has protective benefits so that I can keep it going for as long as possible, and ideally till maturity. Long-winded I know - but thats my 2 cents just on a retirement product strategy. :) If anything, regarding the funds you choose to invest in, try to make sure at least 50% get regular quarterly/bi-annual/annual interest or dividends etc. - that cashflow will save you a lot of pain and be a reliable source of 'income' that builds up over the years. :)
Reply to RC
Posted by: GP | 2013/07/08 10:39
there are three main factors that would determine the value of your retirement benefit, they are time invested, amounts invested and real rate of return on those investments over time. Your financial advisor would need to moitor how you are tracking towards reaching your goal on an annual basis. if they are not doing this fire them...
Reply to GP
Posted by: Anonymous | 2013/07/08 10:04
The reason the question wasn't answered is because no "retirement expert" can answer that. It's all a guessing game. The only definite winners at the end of it all are the financial institutions - the never lose.
Reply to Anonymous
Posted by: Anonymous | 2013/07/06 11:42
The important question asked was not answered, 2/10 for the comment.
Reply to Anonymous

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