One thing South Africans can do to boost their retirement savings by millions

South Africans can increase their retirement savings by millions by adding a once-off investment to their regular retirement savings.

Momentum’s head of product solutions, Pieter Albertyn, said this is something many people already do, especially before the end of the tax year on 28 February. 

“This is because of the huge tax breaks you can get, and most people want to make the most of that every year,” he said. 

“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.”

Therefore, if you add a bonus of R10,000 to your retirement savings and you usually pay a tax rate of 25%, you get your investment at a considerable discount. 

It will cost you only R7,500 to invest R10,000 because of the R2,500 the South African Revenue Service (SARS) will pay you back.

However, Albertyn said there is a way to ‘rev’ this benefit up by using compound interest. 

He explained that the word “compound” refers to two kinds of interest working for you – the growth you earn on the money you invest and 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,” he said.

To illustrate this, Albertyn described four different “routes” someone can take with their retirement savings and the outcome of each option.

For this example, Albertyn described Tumiso, a 30-year old South African who is earning R30,000 monthly and, therefore, pays income tax of 26%. 

Tumiso contributes R4,500 per month to a retirement annuity (RA) wherein his money grows at 12% per year. 

Albertyn also assumed Tumiso’s salary would increase by 5% per year, and he would increase his retirement contributions by the same rate.

Over the next 25 years, until he reaches the retirement age of 55, there are four “routes” Tumiso could take in terms of retirement contributions:

• 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.

If the retirement value is rounded off to the nearest million, this will be the outcome of each different route:

• Scenario 1: Only RA – R21 million
• Scenario 2: RA + thirteenth cheque – R32 million (53% more)
• Scenario 3: RA + tax rebate – R26 million (25% more)
• Scenario 4: RA + thirteenth cheque + tax rebate – R37 million (77% more)

Albertyn noted that 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.

“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%,” he said. 

“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’s 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.” 

He urged South Africans not to underestimate the horsepower of compound interest over time. 

“Every bit you can add to your retirement money will multiply it with the power of growth on growth over time,” he said. 

South Africa’s big retirement problem

South Africans are living longer, requiring a reassessment of retirement savings and investment strategies. 

Discovery Invest CEO Kenny Rabson recently highlighted that Vitality clients, on average, live to 83, exceeding life expectancy in developed economies.  

“While the impact of science on longevity is undoubtedly a cause for celebration, it introduces something of a conundrum when it comes to planning for retirement,” he said.

A key concern is outliving savings. Rabson said that if a client is sicker during their earlier years of retirement, they will typically have three times more out-of-pocket medical expenses, which can significantly impact their retirement fund. 

These often-unforeseen expenses challenge traditional retirement planning.  Longer lifespans also impact savings behaviour. 

“If a client lives five years longer than expected, their replacement ratio can fall below 50%, creating a serious challenge to maintaining their lifestyle in retirement,” Rabson explained. 

“It’s a complex advice spectrum that advisers must navigate, balancing health, longevity, and finances.”

He added that poor financial decisions exacerbate the problem.

“The fact is that clients are actually largely irrational. There are so many books and papers that have been written now in terms of how decisions are shaped by how losses are perceived,” Rabson said. 

He cited biases like loss aversion and the preference for immediate rewards over larger, delayed ones as detrimental factors.

Rabson added that market volatility has led to overly conservative investment approaches, with many choosing fixed-income over equity funds, hindering long-term growth.