As outlined in the 2023/2024 Retirement Reality report, it’s alarming that only 6% of people have sufficiently prepared for retirement. This underscores the necessity of examining how working longer can impact your retirement readiness.

If you’re interested in discussing your retirement options with experienced investment professionals at no cost, contact 10X Investments.

What difference does an extra year make?

You may be surprised by the considerable impact that just one more year of employment can have on your retirement strategy.

Firstly, you’ll continue to add to your retirement savings. For instance, if you earn R80 000 per month and save 15% for retirement, that’s an additional R144 000 saved over the year—before factoring in your employer’s contributions or tax benefits.

In addition, the benefits are twofold. Working an extra year not only increases your savings but also decreases the duration you’ll depend on those savings.

Let’s illustrate this with some numbers:

Imagine you want to draw R50 000 monthly from your retirement savings to maintain your lifestyle. With a 5% annual drawdown, you would need around R12 million saved to sustain that for over 20 years of retirement. By working just one additional year, you can reduce the length of your retirement while allowing your existing savings more time to grow.

As for growth, your savings will greatly benefit from that extra year. A portfolio of R5 million that grows at 6% above inflation could contribute around R300 000 to your retirement fund—without any extra contributions from you. This could cover several months of your retirement expenses.*

* For the sake of clarity, this hypothetical example does not take into account potential market fluctuations, variations in returns, fees, or taxes, and assumes consistent withdrawal and inflation rates.

A simple fact about expenses

Every rand you save from your monthly expenses effectively doubles in importance for your retirement planning. How is this feasible? Think about investing in a low-cost, high-performance living annuity and aiming to withdraw a sustainable income from it.

If you reduce your monthly expenses by R5, that amounts to an extra R60 saved each year before retirement. More importantly, it means you’ll need R1.2 million less in total savings to cover the same expenses during retirement at a drawdown rate.

Furthermore, there’s another advantage: withdrawing less from your living annuity not only preserves more of your capital but also potentially reduces your tax burden. Keep in mind that you’ll incur income tax on any amount you withdraw from your living annuity. Opting to withdraw R30 000 monthly instead of R35 000 can lead to significant tax savings over time—funds that stay invested, working for you during retirement.

The critical effect of investment fees

While managing your daily expenses is crucial, there’s another cost that can drastically influence both your retirement timeline and the longevity of your funds: investment fees. The difference between paying 1% versus 2% or 3% in annual fees may appear minor, but it can have substantial ramifications for your retirement.

Consider this practical example: Suppose you have R6 million in retirement savings and need R25 000 per month. At 1% in investment fees or lower, you could manage this comfortably with a 5% drawdown rate. However, with fees at 2%, you would need to reduce your drawdown rate to 4% to confidently generate the same income and ensure your savings last through retirement. This change means you’d require R7.5 million instead of R6 million in savings—an additional R1.5 million solely to counter higher fees.

This fee discrepancy could result in:

• Working several more years to accrue an extra R1.5 million; or
• Cutting your monthly retirement income by R5 000 to sustain a sustainable drawdown rate.

Essentially, investing with lower fees may enable you to retire sooner, withdraw the same income from a smaller retirement portfolio, or maintain a lower withdrawal rate to extend the life of your funds.

Our Living Annuity Calculator clearly illustrates this: lower fees allow more of your investment returns to remain invested and compound over time, rather than being depleted by costs. This can be the decisive factor between retiring now or needing to work for several more years to build up savings.

Did you know you can find out if your investments might perform better with a free comparison report from 10X Investments?

You don’t have to choose an all-or-nothing approach

Retirement doesn’t have to be an all-or-nothing decision. Many South Africans are innovatively combining various income sources as they transition into retirement.

Think about rental properties. Earning R8 000 monthly from a rental property may initially appear insignificant, but it can greatly influence how much you need to withdraw from your retirement savings. Alternatively, consider utilizing your skills for consulting work—earning R10 000 a month from occasional gigs means you need to draw R120 000 less from your retirement fund each year.

Making wise lifestyle changes

Not all expense reductions require significant sacrifices.

In fact, many retirement adjustments can lead to naturally lower costs:

• Housing usually represents the largest expense during retirement. Downsizing to a smaller home or moving to a more affordable area can drastically reduce monthly expenses while freeing up capital from the sale of your property.
• Transportation costs often decline in retirement. Without a daily commute, many retirees find they can manage with one vehicle instead of two, or switch to a more fuel-efficient car.
• Leisure and dining habits typically change. Many retirees realize they spend less while enjoying more experiences, as they now have the time to plan and prepare meals at home or enjoy entertainment during off-peak hours.

Finding your balance

Your decision on when to retire hinges on balancing several essential elements: your savings level, expenses, capacity to generate additional income, and personal circumstances. While working longer can enhance your financial position, managing expenses effectively and finding additional income streams may allow you to retire sooner than you think.

Consider these key steps:

• Calculate your necessary monthly expenses;
• Explore opportunities to reduce expenditures;
• Investigate potential additional income sources; and
• Use our Living Annuity Calculator to assess how much income you can sustainably withdraw from your retirement savings.

Retirement planning is not merely about reaching a specific savings goal—it’s about devising a sustainable financial strategy tailored to your unique situation. Whether you choose to work longer, reduce expenses, create additional income streams, or a combination of these strategies, understanding their respective impacts will aid you in making informed decisions for your future. Connect with us if you’d like to explore more 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 is not intended to be taken as financial advice.

10X Investments offers a range of investment options directly to the public, available through the My10X investor portal online at www.10x.co.za, through corporate pension funds, and via your financial advisor.

Presented by 10X Investments.

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