How would you like R5.5 million at retirement?

by , 18 July 2018
How would you like R5.5 million at retirement?
What would you prefer? A pay out of R5.5 million the day you retire, or lifetime guaranteed income of R46,772 per month every month till you pass away.

If you started saving R300 per month towards your retirement in 1978 (roughly 7.5% of the average household income back then) you'd sit with exactly that choice today…

So what's the best choice? How do you ensure that your money lasts you as long as you live?
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Do you take the lump sum or the guaranteed income?
 
Saving R300 a month in 1978, with escalations taking it to R6,500 in 2018 would put your retirement lump sum value at R5.5 million today.

The same money in a Guaranteed Life Annuity from a company like Sanlam would net you R46,772 per month for the rest of your life.

According to a Market Watch survey, around one in five of people that go on pension take their money as a lump sum.

Of these, on average their money runs out within four to five years!

And, with less than 10% of South Africans having enough money to retire on when they want to – you need to ask yourself the question  - Is taking a lump sum the right option or not?


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Why a lump sum seems so attractive – but could prove fatal

When people retire and are handed a lump sum, there’s sometimes what’s known as ‘the lottery effect.

They get more money than they’ve ever seen in their life and say ‘Wow! I can do something I never could when I was working!’

In fact, this “lottery effect” is so profound 22% of retirees that take a lump sum have said they also donate some of the money to family and friends.

Simply put, R5.5 million cash in your bank account might look massively attractive.

And it might seem like you could live on it forever.

But the money could run out much sooner than you think. And then you are left with nothing.

Look, I can totally see why some people might choose to take their employer-based retirement funds as a lump sum rather than an annuity.
 
They might prefer having control over the money so they can invest, save or spend it as they choose.

But I seriously doubt the majority of people actually have the self-discipline to diligently invest this money.

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So, what’s a safer game plan with your retirement money?

When you get close to retirement I would hope that your house is nearly paid off, if it isn’t paid off already.

But, what you will find is that it isn’t necessary to live in a large family home when you’re pushing 70.

So rather sell the house and buy a smaller place in a retirement village or in your ideal retirement location.

Downscaling from a R1.8 million to a R1.2 million place could mean that you don’t owe any money to the bank anymore.

But even if you do – it then only means you might need to pay in R100, 000 or R200,000 instead of R800,000 to have the property paid off when you retire.

 
Rather take the best of both

So, when you retire, instead of taking a full lump sum you rather take a partial lump sum with the rest of your money in an annuity.

Determine how much cash you need to pay off your house (if any).

Add in some cash to buy a new car (preferable nothing flashy).

Let’s say this adds up to R500,000. That’s only 10% of your total retirement savings.

So, your retirement money still sits at R5 million – enough for a R42,520 monthly annuity.

With a paid off property and a paid off car this leaves you with more than enough income to live off.

You’ll have enough to save for emergency’s as well as holidays.

An even better option would be splitting some of the money with your spouse to limit your income tax at retirement as well.

Whatever you do – ensure you don’t ignore your retirement. Make sure you invest enough money today – to look after you tomorrow.


Here’s to unleashing real value

 
Francois Joubert
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