10X Investments (Pty) Ltd recently published its Retirement Reality Report for 2022. It was found that 46% of those surveyed did not have a retirement plan. We often make decisions based on our perceived cost of doing something, but we seldom calculate the cost of inaction.
In real terms, the cost of not having retirement savings is likely a decrease in the standard of living once we retire. Since we all find ourselves in different financial positions with different needs, this decrease in the standard of living would be unique for all of us. For some, it could mean driving a slightly less expensive car while for others it could mean not being able to afford necessities. What is important is that we think about this cost in advance.
We have provided a framework for measuring the cost of not having retirement savings in monetary terms so that you can determine what that cost means for your life in real terms.
We have made the following hypothetical assumptions for our example:
| Age | 30 |
| Retirement Age | 60 |
| Contributions | R5 000 per month |
| Assumed Return | 8% per annum |
| Assumed Tax Rate | 31% |
| Discount Rate | 5% |
Tax Benefits
One of the advantages of using a retirement savings vehicle like a Retirement Annuity is that contributions to the investment are tax deductible per Section 11F of the Income Tax Act. Tax deductions on your contributions are limited to the lesser between R350 000, or 27.5% of your taxable income. From the previous example, the tax saved from contributing R60 000 per year to a retirement fund for 30 years is R558 000.
Another tax advantage of a retirement savings vehicle is that your investment grows tax-free. This has a significant impact on your investment balance over time.
Power of Compounding
The following information refers to the hypothetical data as per the previous example and is not representative of actual return data.
If you assume that the investment grows at 8% per annum over 30 years, the contributed capital of R5000 per month would increase to R7 501 475.89. However, if you invested the tax saving you receive for investing in a retirement vehicle at the beginning of each year, your investment would grow to R10 547 330.85. This is approximately 40% more than if you do not reinvest your tax saving.
Power of Discipline
Although an 8% per annum investment return is possible, it requires the ability of the investor to stay invested in times of volatility. The Annualised Return of the JSE All Share Total Return Index was 9.31% over the last 10 years to 30 September 2022. To earn that return, an investor would have to stay invested even when the Index declined by 35.20% between January and March 2020 during the COVID-19 pandemic or when there was a decline of 45.35% between May and November 2008 during the Global Financial Crisis.
In moments of extreme volatility, a plan and an advisor can help move your focus from short-term market events to long-term trends and prevent your own behaviour from adversely affecting investment outcomes.
So, what is the opportunity cost?
Referring back to the hypothetical example, if the investment value was discounted at a rate of 5% per annum it would be worth R2 440 414.50in today’s terms. For most, this is a significant amount of money which would be given up by simply not saving.
The validity and accuracy of any illustrations, forecasts or hypothetical data are not guaranteed and are only provided for illustrative purposes https://bayswatercapital.co.za/fais-disclaimer/
