Is your retirement savings journey an endurance race like the Dakar?

If you think of your retirement savings journey as an endurance race like the Dakar, you are on the right track to getting it right and save enough for retirement.

And there is a terrific way of improving your chances over the killer dunes on your retirement savings journey, Pieter Albertyn, head of product solutions at Momentum, says.

“I am not a big motorsport fan, but the Dakar race fascinates me: the excitement but especially the endurance. And I cannot help but compare the detailed planning and navigation of the participants with my retirement savings journey and how you must do your best to stay on track.”

What happens under the bonnet for this race is aways improving and rapidly so, he says. “I believe diesel or petrol internal combustion engines are still most popular for the necessary horsepower, but electric and hybrid engines are also showing face – almost like the financial services industry shifting its focus to more modern products and ways, including the two-pot retirement system changes.”

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Improving your retirement annuity’s horsepower is much simpler than for a car

Fortunately, Albertyn says, improving your retirement annuity’s horsepower is a much simpler discussion than it is for a car. “You do not have to be a technological genius, and you do not need a blue overall or get your hands dirty. All you have to do is add a once-off investment to your regular retirement savings.”

Most people prefer to do this before the end of the tax year on 28 February because of the huge tax breaks you can get and most people want to make the most of that every year, he says. “The percentage you get back in your pocket for every rand you put in is the same as the income tax you normally pay, your so-called marginal tax rate.

“This means if you add a bonus of R10 000 to your retirement savings and usually pay a tax rate of 25%, you get your investment at a huge discount. It will cost you only R7 500 to invest R10 000 thanks to the R2 500 Sars will pay you back.”

Albertyn first explains the mechanics of how you can rev up your horsepower. “My workshop tool is compound interest. The “compound” refers to two kinds of interest working for you – the growth you earn on the money you invest, as well as the growth you earn on that growth.

“To be practical, let’s add two more ingredients: time and a financial adviser who can help with advice that suits your circumstances best.”

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How saving can help your retirement savings journey

He made some calculations to illustrate what happens if you add an annual lump sum to your regular retirement investments. “Let’s say Tumiso (30) is earning R30 000 monthly and pays income tax of 26%.

“He contributes R4 500 per month to a retirement annuity and we assume the money grows at 12% per year. We also assume his salary increases by 5% per year and he will increase his retirement contributions by the same rate.”

Now we look over his shoulder over the next 25 years until he reaches the retirement age of 55:

• Scenario 1: He sticks to his plan and adds no further contributions.
• Scenario 2: On top of his monthly investments, he adds a thirteenth cheque every year.
• Scenario 3: On top of his monthly investments, he reinvests the tax rebate he receives every year.
• Scenario 4: On top of his monthly investments, he adds his thirteenth cheque as well as the tax rebate he receives every year.

Albertyn says if you round the retirement value off to the nearest million, this will be the picture:

• Scenario 1: Tumiso has R21 million
• Scenario 2: Tumiso has R32 million (53% more)
• Scenario 3: Tumiso has R26 million (25% more)
• Scenario 4: He has R37 million (77% more).

(The real value – what the money could buy you today – of the four scenarios are R3.6 million; R5.5 million; R4.5 million and R6.4 million.)

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Saving all the little surprises from Sars and your bonus for retirement

Albertyn says this means the discipline of adding a thirteenth cheque (or similar once-off amount) every year will increase your retirement money by more than 50%. “And if you reinvest your yearly tax rebate on top of that, instead of spending it, your retirement money will be an incredible 77% more. There is money to be made through regular habits.”

With little imagination, you can see what will happen if you put your retirement money in the fast lane, Albertyn says.

“Never ever underestimate the horsepower of compound interest over time. Hopefully, your journey to retirement will be successful and not as challenging as the Dakar. But follow the example of those incredible vehicles and rev up your retirement savings. Every bit you can add to your retirement money will multiply it with the power of growth on growth over time.”