Why should I save for retirement?

Key takeaways

  • If you fail to save anything for retirement, plan B is the very meagre social old age grant.
  • The earlier you start, the more your money will do the heavy lifting for you.
  • Tax deductions can boost your retirement nest egg.
  • Business and property assets can add to your wealth, but can also fail you as a retirement plan.

Retirement may be something you don’t even want to think about right now. You may believe you will never retire, or you may be eager to reach financial freedom – to be able to live off your investments with no need to work - as soon as possible. Whatever your thinking, here are four good reasons to consider saving in an approved retirement fund:

1. Social security is disappointing

It is particularly important for us, as South Africans, to save for our own retirement as the only social security available for older people currently is the state old age grant.

In 2023/2024, the old age grant is R2 085 a month for people over the age of 60 and R2 105 for those over the age of 75.

Although all South African residents over the age of 60 are eligible for the grant, there is a means test, and if you own property, have some other investments or have a spouse with an income, you may qualify for a lower amount, or you may not be eligible for a grant at all.

For many working South Africans, the old age grant is way below their current earnings. This is why you need to set money aside now to provide an income or pension that will, when you reach retirement, replace a good proportion of what you are accustomed to living on during your working years.

2. Your money can do some work for you

The sooner you start saving for retirement or financial freedom, the lower the amount you have to put away, and the harder your money works for you – earning returns on your savings and compounding that growth to your benefit.

When you are saving, make sure you do not dip into those savings, even when you resign from a job. Withdrawing your retirement savings will make it much harder for you to save enough to provide the level of comfort you are used to. Read more Why is withdrawing from my retirement fund a bad idea?

It is not a good idea to put off saving until later when you are earning more, as there may be many other reasons that could make it more difficult to save when you are older, such as the costs of providing for a family or supporting ageing parents.

3. Tax savings will help you

If you save for retirement in a registered retirement fund, you can enjoy tax savings, which means you can save more than if you save without this tax incentive.

These tax savings will also compound over the years that you save for retirement, helping you to get the amount you will need. Read more: What are the tax advantages of contributing to a retirement fund?

4. Other investments may disappoint you

If you are a business owner, you may think your business is your retirement plan. Many business owners have, however, found it hard to realise the full value of their businesses at retirement. For example, if the business relies on your expertise, it’s value could be reduced due to the loss of your key skills when you want to exit.

You can also never predict with any certainty the future value of your business. Times change and with them the habits of your customers.

South Africans also often think they can downscale their homes or sell a rental or second property at retirement to release additional savings for retirement.

But as with relying on your business to fund your retirement, this plan also has potential pitfalls. You are relying on one property to fund your retirement without having any certainty about what could happen to the area where your property is situated, or the value of property at that time.

Both the sale of a business and the sale of investment properties will attract capital gains tax (CGT). And while you may be able to deduct certain business expenses from your profits or rental income, the amounts you invest are not fully tax deductible. Contributions to a retirement fund, however, are deductible, up certain annual limits.

If you invest in a retirement fund that is exposed to the financial markets, you will be diversifying across markets rather than relying on a single asset.

This is not to say that property or a business can’t be a great investment that adds greatly to your wealth. Just be careful not to put all your eggs in one basket.

Remember too that if you prefer investing in property or a business to saving in a retirement fund, you won’t benefit from any tax deductions and the sale of your property or business at retirement will incur capital gains tax.