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First up: Early retirement
Facing early retirement is probably the most challenging and dangerous period in an investor’s life.
The decisions you make today will have an impact on the rest of your life. For you there are no second chances.
And while the questions below may seem uncomfortable or complicated, when it comes to importance, they easily rank up there with: “What career should I pursue?” or “Who should I marry?”.
Because the answer to these questions could very likely mean the difference between a comfortable retirement and facing your golden years in poverty.
If, you’re facing early retirement, watch your step today, because I’m going to drop some knowledge.
Here's the PROOF: This recently made R8,848 in just a month (Since the COVID-19 Lockdown)
The three biggest retirement questions being asked right now:
1. Should I take all my money out and just pay the tax penalty?
Except in extraordinary circumstances, I would advise against this. If you have a very small retirement policy or if you have health issues that mean you won’t need to draw on these funds several years down the line, then it might be worth the penalty to get access to all your funds immediately. In all other circumstances the answer is most probably NO!
2. If I just use the 1/3 withdrawal limit, how much should I take out?
You can take up to R500,000 out without paying any tax. This is a lifetime limit and is affected by retrenchment pay-outs as well. Most people should take advantage of this allowance.
The next R200,000 can be withdrawn at an 18% tax rate. If you’re planning to withdraw more than R10,000 per month from your Living Annuity, then it is most probably worth using this additional R200,000 allowance as well.
For the next R350,000 the tax rate moves up to 27% and thereafter you will be taxed 36%. To determine whether you should use these allowances is difficult without specific information on your situation.
3. How much should I draw per month after I retire?
Many financial advisors recommend a maximum of 6% per year at the start of retirement. They would claim this is a sustainable withdrawal rate. In reality 6% may have been sustainable in the past, there is no guarantee that it will be so in the future.
The amount you withdraw depends on various factors, but in the current environment I would recommend being as cautious as you possibly can be.
We are likely to be entering one of the worst periods of economic contraction in living memory. The depth and duration of the downturn is uncertain. As a new retiree, in such a situation hunkering down until greater certainty returns is almost certainly the best approach.
Remember: The way you handle these questions is going to affect the rest of your life. And unfortunately, you may never be able to overcome a bad choice. But, since everyone’s financial circumstance is different, please do seek professional advice before making any decisions.
You’re welcome to contact me directly and I am more than happy to look at your personal situation. Often there are mitigating factors that will allow you to withdraw far more than the regular 6%. In other cases, there are programs specifically created to help certain classes of investor.
We’re entering a period in which good advice is more critical than ever before. It’s also a period in which we all need to look out for one another.
So, until next week, stay safe!
Rand Swiss, Wealth Manager