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Financial planning



Retirement Planning

The role inflation plays in your retirement planning


One of the ultimate long-term goals for many investors is to retire comfortably and maintain a high standard of living without working. While contributing to a nest egg regularly is essential in this journey, equally important is ensuring your retirement savings and investments grow at a rate higher than inflation.

Inflation refers to a sustained increase in the general price level of goods and services over time. If your money is growing at a rate lower than the general increase in the cost of goods and services, it essentially means that your savings are losing value year after year. Today a Coca-Cola (Coke) costs R10.00. If Coke increases at the cost of inflation, a Coke could cost R12.50 in five years. If your money were under your mattress over this time, you will have to pay R2.50 extra for a Coke. Your money will effectively be worth less because you can purchase fewer goods and services with the same amount. Utilising long-term investment and savings instruments mitigates this risk and ensures your retirement nest egg does not lose value "in real terms" over time. Understanding this early on in your retirement journey will make it easier to overcome the natural increase in prices and ensure you are set for a comfortable retirement.

Company pension funds are put in place for employees to contribute monthly, with certain companies matching employee contributions. While contributing to a pension fund is a fantastic way to build up a nest egg over your career, you can include additional savings and investment vehicles to assist in outperforming the increased cost of living over the long term. Company pension funds have a low-risk profile, meaning they place money into low-risk assets. This is to protect capital as much as possible; however, the lower the risk, the lower the potential returns. The incorporation of additional instruments into your retirement journey can allow you to diversify your long-term savings and investments, increase potential returns and take full advantage of tax allowances for retirement purposes. When looking to incorporate additional vehicles the following should be considered:

Answering the following six questions will assist in determining which long-term investing and saving instruments are best suited to your retirement journey:

  1. When will the funds be required?
    There are certain long-term retirement vehicles, like retirement annuity funds, that should only be accessed post-retirement age, as large early withdrawal fees apply. Should your timeline be below 55 years of age, a different instrument will need to be utilised and so the importance of understanding your timeline is magnified. Understanding your timeline is the first essential step in correct long-term vehicle selection.
  2. How much risk are you willing to take?
    An investor in their 20s has a higher risk threshold than that of a 50-year-old and the reason is that there is less time to recover should capital decrease. Understanding your risk profile will assist in correctly selecting assets that align with your goal. Investors close to or past retirement age can't afford to invest in risky assets, as that nest egg is needed to live on, whereas a younger investor still has their income from their career to build that nest egg up again.
  3. Do you require flexibility to access those funds if they are needed?
    Are you an investor looking to put money away and only have access to it post-retirement, or are you looking to access these funds during your working career? The answer to this question defines what type of instruments are best suited to your investment needs.
  4. Will your savings beat the increase in inflation?
    Beating inflation and outperforming the increased cost of living is essential in preserving your nest egg. Investing all your funds in risk-averse assets might result in your retirement savings underperforming and losing value each year. Retirement requires a diversified strategy with a balance of instruments, reducing portfolio risk and giving an investor the best possible chance of growing retirement funds sustainably.
  5. Are you going to make monthly contributions or invest a lump sum?
    How are you looking at saving? Have you moved jobs and thus have a lump sum retirement payout that needs to be reinvested and not spent? Or are you looking at contributing monthly to a long-term investment vehicle that allows flexibility?
  6. Have you taken full advantage of the tax deductions for retirement contributions?
    Amounts contributed to a pension, provident or retirement annuity fund are deductible for tax purposes up to 27.5% of the gross remuneration or taxable income with a limit of R350,000. Should your contributions to your pension fund be below the 27.5% limit, consider contributing to another retirement instrument to take full advantage of the tax deductions.

Once you have answered these questions and understand your long-term retirement goals, there is a range of saving and investment instruments that can help you beat inflation, save and invest correctly for your ultimate long-term goal - retirement. Alternative retirement instruments to a pension fund are retirement annuity funds (RAF) and a provident fund. Contributing to these vehicles is perfect for those who either don't have a company pension fund or have not reached the 27.5% tax deduction limit.


A retirement annuity fund is a long-term savings vehicle set up for retirement. An RAF allows you to grow your savings with no tax on interest, dividends or capital appreciation; however, you must wait before turning 55 years old to convert your contributions into monthly annuities. Should you withdraw funds before that you will be heavily taxed. When investing into an RAF your money is tied up, thus an RAF has been designed specifically with retirement in mind as the money can only be used once you reach retirement age.

There is a tax benefit to an RAF in that all contributions can be deducted up to a maximum of 27.5% of your taxable income or R350,000. The tax deduction effectively acts as tax savings, there are also no contribution limits and any non-deductible contributions will be rolled over and deducted in the following tax year.

Provident fund

Like a pension fund, a provident fund provides benefits for its members when they retire from employment. The fund also usually pays benefits when a member dies while still working, is unable to work because of illness, or is retrenched.

Contributions to a provident fund allow for the same tax deductions as RAF and pension funds.

Pension fund

The difference between a pension fund and a provident fund is that if a pension fund member retires, the member gets one-third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member's life. A provident fund member can get the full benefit paid in a cash lump sum.

These three retirement vehicles are efficient from a tax point of view and allow for capital preservation. Long-term savers and investors looking to grow funds at a higher rate need to consider adding discretionary vehicles to their long-term plans. The following vehicles allow investors to earn higher potential returns over the long term and should also be used in conjunction with the above-mentioned retirement vehicles:

  • Exchange-traded funds (ETFs) - an ETF is a passively managed investment that tracks a basket of shares or an index. This is a low-cost option to buy exposure to many shares that make up an index. Investing in ETFs offers flexibility in terms of how much you contribute, the ability to cash out should you choose to do so at any time, and a low initial contribution from as little as R500. ETFs are a good long-term investment vehicle and can be bought and sold through a stockbroker like FNB Share Invest or FNB Stockbroking and Portfolio Management.
  • Unit trusts - Unit trusts allow the investor to get exposure to different asset classes, like cash, bonds, property and equities, with a single investment. FNB offers five funds that have been designed to match your goals and developed to ensure that investors get the maximum benefit during their desired investment period.
  • Tax-free savings account (TFSA) - Investments in ETFs and unit trusts can also be made via an FNB TFSA structure. When using a TFSA both the capital appreciation and income are tax-free if you do not exceed the maximum contribution of R36,000 per year and the R500,000 limit over your lifetime. Contributions can be made monthly or in a lump sum and funds can be withdrawn with short notice should they be required (but keep in mind that this affects your contribution limits). Designing your investments through a tax-free structure increases your overall returns due to the tax benefits, thereby accelerating your goal timeline.

In closing

There is no limit to the number of retirement vehicles allowed and it is always advised to have more than one retirement contribution vehicle to assist in growing wealth long term and outperforming the cost of inflation over your working career.