I just turned 44, and yet I still feel 25, while my body tells a different story. I’ve been blessed enough to forge a career in financial planning from the age of 25 and was fortunate enough (early on) to imparted with the wisdom of the 5 P’s (Properly Planning Prevents Poor Performance).
The 5 P’s couldn’t be more appropriate when discussing retirement planning, so let’s talk about income replacement ratio…say what?
The more you save in the earlier years the higher your income replacement ratio will be (when you retire). Furthermore, to ensure that you maintain the level of income replacement you require, you should consistently track your income needs to assess whether your savings is on track to match your income in retirement.
Understanding and proactively managing your replacement level of your income throughout various life stages is crucial for effective retirement planning. By reviewing and tweaking your replacement ratio from early in your career to post-retirement, you consistently recalibrate and set realistic savings targets, align them to your evolving needs, and approach your retirement with conviction.
Where do I find the time? I’m busy focusing on my career, my family, etc. Simple….. invest in good financial advice (outsource), he/she will run the numbers, keep you honest and yes….tell you that you need to increase your contributions (inflation is a beast!)
You may be wary of approaching financial planners and advisers and pay for advice (it’s way out of my league) yet this is one of the most important investments you can make in yourself and your financial wellbeing. It will ensure your needs are properly assessed, where and how much you should invest to reach your goals.
While this regular check up is just as important as your annual dental check up it’s just as important to ensure you have the right tools in your toolbox. At InvestLife we refer to this as the bucket approach.
Now whilst we generally apply this to a client investment strategy in the form of income, defensive and growth buckets, we adapt this methodology to our clients retirement savings as a whole as well. The bucket approach refers to having multiple (invaluable) investable buckets or pockets which you will call on when you retire.
Too often have we found that when individuals plan for their retirement, they take a somewhat linear approach and just invest in a retirement vehicle or two (eg. Retirement Annuity, Provident Fund, Pension Fund) while very few client’s take advantage of other discretionary bucket vehicles like a Tax Free Investment Account. A market linked account allows you to invest without having to worry about how (in the long term) this money will be taxed as all the growth and proceeds are tax free!
Another area in which we see an opportunity for clients who have been diligent in topping up their discretionary bucket but they have that little bit extra to invest, is actually over-contributing to your retirement funds. Whilst this will not give you any tax benefit in the year of over contribution, you can deduct it in subsequent years.
Discretionary (fancy word for flexible) investments play a vital role in your retirement, and whilst there are no initial tax benefits from investing in discretionary investments when you retire most if not all of your retirement savings will been converted to an income, helpful for paying your expenses, not so much when it comes to unforeseen (capital) expenses such as medical treatment (post hospitalisation), replacement of vehicles (plural), yes if we’ve done the 5 P’s well the majority of us will be on retirement for 25yrs (that’s 40% of your life on earth!).
As your retirement income is subject to income tax both these discretionary investments also provide you the flexibility to manage your income tax (liability), assuming you draw your retirement income from a living annuity (don’t worry we’ll do a deep dive into this sometime) you can draw a reduced/minimal salary from your retirement savings (yes and pay less tax!) and top up the balance through tax free monthly withdrawals from your discretionary investments (again using a bucket investment strategy/approach). You can (even)go one better, reinvesting (recycling) some of your discretionary investments back into a retirement bucket/vehicle and can further reduce the tax you were expected to pay (nice!).
In conclusion.
I know this may come as a downer and is in total contradiction to what society and social media tell you (instant gratification) but fortunes take time, have realistic expectations.
We see a lot of stories of people who made a lot of money, seemingly quickly. These give the impression that you can get rich quickly. It rarely happens.
A few people do get rich quickly, but 99% of us work and invest over time and build our wealth. And, even the entrepreneur that looks like they got rich quickly spent years working and trying things out before achieving success. It’s a marathon not a sprint! Stick with your strategy, invest when you can as early as you can and your wealth will grow!
If you want to learn more about our approach to investing and financial planning, drop us an email or give me a call to assist you with your 5P’s.
Troy Donaldson
InvestLife Advisory
