Planning for retirement remains one of the longest financial journeys most South Africans will undertake, with success depending more on consistency than perfect timing, according to financial planning experts.
Richard Carter, head of assurance at Allan Gray, says the key lies in sticking to a sound strategy rather than constantly searching for the perfect one.
“Markets will fluctuate, but a well-constructed plan anticipates volatility and is designed to withstand it,” Carter says.
Building your retirement fund
The accumulation phase forms the foundation of retirement planning. Starting early, increasing contributions when possible, and staying invested through uncertain times all compound meaningfully over decades.
However, interruptions, delays, withdrawals and reactive decision-making can erode outcomes in ways that become difficult to recover from later.
The two-pot retirement system introduced in 2024 allows investors to access their savings component once per tax year for emergencies. Whilst this provides some flexibility, pre-retirement withdrawals face heavy taxation and significantly reduce the final retirement amount.
What to consider when retiring
Unlike the relatively straightforward process of contributing to a retirement fund, the decisions required at retirement demand careful thought.
Investors need to assess their assets and liabilities, calculate their income needs, understand their tolerance for investment risk, and determine an appropriate withdrawal rate to ensure their money lasts throughout retirement.
Health and life expectancy also play a crucial role, particularly as South Africans increasingly live longer and require their capital to support them for extended periods.
The cash lump sum decision
Most retirement fund members can take up to one-third of their benefit as a cash lump sum, subject to fund rules and previous withdrawals.
Financial advisers caution that this figure represents a maximum allowable amount rather than a recommended target. Taking cash reduces the capital available to generate future income, and carries tax implications that need careful consideration.
Living annuity versus guaranteed life annuity
The portion not taken as cash must generate income, typically through either a living annuity or a guaranteed life annuity.
A living annuity allows money to continue growing based on underlying investment performance. Investors choose their income level within set limits and select investments, usually unit trusts. Capital remains invested and fluctuates with market performance and withdrawals.
This option suits those who value control, feel comfortable managing income sustainability, and wish to leave capital to beneficiaries. However, it places responsibility for managing longevity risk on the investor.
A guaranteed life annuity, purchased from an insurer, pays income for life regardless of how long the investor lives. It can continue for a spouse and offers various options for income increases and protection features.
This suits investors seeking certainty, those less concerned about leaving a legacy, and people preferring not to manage investments or make ongoing financial decisions. The trade-off comes in reduced flexibility.
Since 2019, pension fund trustees have been required to provide default investment strategies and cost-effective annuity options for members at retirement. These options remain voluntary but offer members additional alternatives to consider.
Carter recommends using educational resources and seeking guidance from independent financial advisers to align decisions with personal circumstances and long-term objectives.
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