Last Updated on 17/01/2025 by Carl-Peter Lehmann
Retirement planning is a critical aspect of financial security, yet it often gets pushed aside in the busyness of life. With shifting global trends, increasing life expectancies, and economic uncertainties, planning for retirement in 2025 requires a fresh perspective. This guide aims to provide you with actionable insights tailored for South African investors, helping you navigate the complexities of retirement planning and achieve financial freedom.
Why Retirement Planning Matters
Retirement planning is more than just saving money; it’s about building a financial strategy that ensures you can live comfortably and achieve your desired lifestyle in your golden years. Without proper planning, you risk outliving your savings, especially given South Africa’s rising cost of living and healthcare.
Key Statistics to Consider:
1. To replace 75% of your final working income, you need to invest 17% of your income for 40 years at a return of Inflation Plus 5%.
2. Less than 10% of South Africans are financially prepared for retirement, according to recent studies.
These figures underscore the importance of starting early and staying disciplined in your approach to retirement savings.
2025 Trends in Retirement Planning
The retirement landscape is evolving. Here are some of the key trends to keep in mind:
1. Dynamic Drawdown Strategies
Traditional fixed withdrawal rates are being replaced by flexible strategies that adjust withdrawals based on market conditions. For instance, you might skip inflation adjustments in years when the market underperforms to preserve your portfolio.
2. Renewed Popularity of Guaranteed Life Annuities
In today’s favorable interest rate environment, guaranteed life annuities are becoming a preferred option for retirees seeking stability and predictable income.
3. Global Retirement Planning
More South Africans are viewing themselves as global citizens, with retirement goals measured in foreign currencies like USD. Offshore investments are increasingly central to achieving financial security and hedging against local economic risks.
4. Lifestyle-Centric Retirement Planning
Retirees are prioritizing higher spending in the early years of retirement for activities like travel, while accounting for increased healthcare costs in later years.
Key Components of a Retirement Plan
To build a robust retirement plan, you need to focus on these essential components:
1. Set Clear Retirement Goals
Define what retirement looks like for you. Do you want to travel extensively, downsize your home, or pursue hobbies? Quantify your goals to determine how much you need to save. Consider creating specific milestones for different phases of retirement, such as:
Active Retirement (Ages 60-75): Focus on travel, leisure, and hobbies.
Moderate Retirement (Ages 75-85): Adjust expenses to reflect fewer travel activities but increased medical care.
Later Retirement (Ages 85+): Plan for higher healthcare costs and possible long-term care needs.
Breaking retirement into phases helps you identify and address the financial needs of each stage, ensuring you are adequately prepared for the entirety of your retirement years.
2. Evaluate Your Savings and Investments
Audit your current savings and assess whether they align with your retirement goals. A good mix of the following investment vehicles to include:
1. Retirement Annuities (RAs): Tax-efficient investment vehicles that offer long-term growth.
2. Pension and Provident Funds: Employer-sponsored savings plans that form the foundation of many retirement strategies.
3. Tax-Free Savings Accounts (TFSAs): Ideal for supplementing retirement savings without worrying about tax implications.
4. Offshore Investments: Provide currency diversification and access to global growth opportunities.
5. Discretionary Local Investments: These investments offer flexibility and liquidity, making them a valuable complement to more structured retirement accounts.
Additionally, take a hard look at whether you’re saving and investing enough. Are your current contributions sufficient to meet your goals? Use tools like retirement calculators to estimate the gap between your projected savings and what you’ll actually need. Adjust your strategy as necessary to stay on track.
Evaluate whether your current portfolio is adequately diversified. A well-balanced mix of equities, bonds, property, and cash ensures your investments can weather market volatility while delivering steady returns.
3. Understand Replacement Ratios
A replacement ratio measures how much of your pre-retirement income you need to maintain your lifestyle. While the target is typically 70% to 75%, this can vary based on your lifestyle choices, debt levels, and retirement goals.
To calculate your replacement ratio:
- Add up your estimated retirement expenses, including housing, healthcare, travel, and daily living costs.
- Divide this by your current pre-tax income.
- Adjust for inflation and unforeseen expenses.
Remember that healthcare costs and lifestyle changes can significantly impact your replacement ratio, so revisit your calculations periodically.
4. Incorporate Tax Planning
Tax efficiency can significantly impact your retirement savings. Take advantage of the tax deductions available for RA contributions, which can reduce your taxable income. In addition, consider these strategies:
- Use Tax-Free Savings Accounts (TFSAs) to grow your investments without incurring capital gains tax.
- Structure your retirement income to minimize tax liability, such as balancing withdrawals from RAs, pension/provident funds, and discretionary investments.
- Consider using tax-efficient investment ‘wrappers’ if you’re on a high marginal tax rate to reduce CGT and help with your estate planning.
5. Diversify Your Investments
A diversified portfolio that includes local and offshore assets is crucial for managing risk and achieving sustainable returns. Consider the following strategies:
Local Investments: Ensure exposure to South African equities, bonds, and property to benefit from local economic growth.
Offshore Investments: Allocate a portion of your portfolio to global equities, bonds, and ETFs to hedge against currency risk and gain access to broader growth opportunities.
Alternative Investments: Explore options like private equity, hedge funds, property, and even crypto, to add an extra layer of diversification.
While diversification is key, pay close attention to the kinds of returns you are achieving versus the returns you need. If you require returns of Inflation Plus 5% but aren’t achieving them, it could indicate that your asset allocation needs revisiting. Constructing your entire investment portfolio with the right balance of growth and stability is crucial to meeting your retirement goals.
Rebalancing your portfolio annually ensures that your asset allocation aligns with your risk tolerance and retirement goals.
6. Plan for Healthcare Costs
Healthcare is often one of the largest expenses in retirement. Include provisions for:
1. Higher Medical Aid Costs: Ensure you have adequate medical cover that will meet your needs.
2. Gap Cover: Protect yourself from unexpected expenses not covered by your medical aid.
3. Long-Term Care: Plan for potential costs associated with assisted living or in-home care.
By addressing healthcare costs early, you can avoid depleting your retirement savings later in life.
Retire Smart Principles: Practical Strategies for South Africans
1. Start Early, Save Consistently
Time is your greatest asset when it comes to retirement savings. A consistent investment approach can take advantage of compounding returns, even if you start small. For example:
Begin with 15% of your income and gradually increase contributions as your earnings grow.
Automate your savings to ensure consistency.
2. Leverage Low-Cost Balanced Funds and ETFs
For younger investors or those with less complex needs, balanced funds and ETFs offer an easy way to get exposure to multiple asset classes while keeping costs low. These funds simplify decision-making and provide diversification in a single investment.
3. Incorporate Offshore Investments
Given the rand’s volatility and South Africa’s economic challenges, investing offshore can provide both growth and currency diversification. Options include:
- Global Equity Funds: Access the growth potential of leading international companies.
- ETFs: A cost-effective way to gain broad exposure to global markets.
4. Review Your Plan Regularly
Life circumstances and markets change. Schedule regular reviews to ensure your plan remains aligned with your goals. Use this opportunity to:
- Adjust your asset allocation.
- Reassess your replacement ratio (whether you’re on track).
- Update your retirement milestones.
5. Consider Professional Advice
A Certified Financial Planner (CFP) can provide tailored strategies and act as a sounding board for major decisions. Their expertise ensures your plan accounts for the latest market trends and legislative changes.
Streamlining Your Retirement Investment Options
The journey to financial independence includes diversifying your investments across various assets, products, and strategies. While the government offers incentives for retirement planning through tax advantages, focusing solely on traditional retirement vehicles like balanced funds may not always deliver the returns you need. To achieve sustainable financial security, it’s crucial to diversify beyond these options.
1. Understanding Approved Retirement Funds in South Africa
Approved retirement funds, such as pension, provident, preservation, or retirement annuity funds, offer tax deductions up to 27.5% of your income, with a maximum of R350,000 per year for all contributions. From age 55, you can access a third of your fund as a tax-free lump sum and use the remainder to purchase an annuity for retirement income.
2. Employer-Sponsored Funds and Individual Contributions
With pension and provident funds typically employer-sponsored, and retirement annuities geared towards individual savers, these funds offer foundational benefits. They allow tax-free growth until retirement, when the income becomes taxable. However, relying solely on these funds may limit your ability to achieve the necessary growth rates, especially if your goal is a return of Inflation Plus 5% or higher.
3. Maximizing Benefits
Leverage tax breaks and employer matching contributions – essentially ‘free money’ – to your advantage. When changing jobs, resist cashing out; instead, preserve your nest egg through a preservation fund. Stay informed about the upcoming two-pot retirement system.
4. The Case for Diversification Beyond Traditional Funds
Balanced funds are the primary investment vehicle in South Africa due to their Regulation 28 compliance and diversified allocation across equities, bonds, and cash. However, as the chart demonstrates, other investment types – like Global Equity Funds (13.07% annual return over five years) and SA Equity Funds (11.16%) – have outperformed balanced funds (9.86%) over the same period.
**Of course its not an entirely fair comparison because we’re not taking into account the impact of the tax advantages – and comparing a multi-asset portfolio to an equity portfolio should show significant differences.**
This highlights the importance of constructing a portfolio that extends beyond traditional retirement vehicles. Diversification into global equities, multi-asset flexible funds, and other high-performing categories can enhance your returns and help bridge the gap between what you’re achieving and what you need.
Actionable Advice:
1. Analyze Returns vs. Goals: Are your current investments delivering the returns you need? If not, consider reallocating to more growth-oriented funds like global equity or SA equity funds.
2. Revisit Asset Allocation: High equity allocations in growth-focused funds can significantly impact your long-term results, particularly if retirement is more than 7 years away.
3. Incorporate Offshore Investments: Hedge against currency and local market risks by investing in global funds.
4. Consider Professional Guidance: Diversifying effectively requires understanding asset correlations and risk management. A financial planner can help you build a robust, diversified portfolio tailored to your goals.
Retirement annuities are of course popular vehicles used to make individual retirement contributions. Used well, they also have many benefits. Unlike with pension and provident funds, they don’t give you access until you reach the age of 55 (if you move jobs) – which is a good thing – and will be changing with the new two pot system anyway. Read our article on the benefits of using a retirement annuity as part of your retirement planning strategy.
Retirement Planning and the Case for Offshore Investing
Relying solely on local investments, like balanced funds or even Rand-denominated offshore funds like shown above, limits your exposure to global opportunities. The chart demonstrates the vast differences in US Dollar performance across markets, showing why offshore investments are a critical part of a diversified portfolio.
The chart illustrates the 5-year total return of various global ETFs, offering insight into how different markets and asset classes perform over time. Here’s a breakdown:
1. SPY (S&P 500 ETF): 91.22% Total Return (Annualized: ~13.85%)
The S&P 500 index demonstrates the consistent strength of the U.S. market, driven by technology, healthcare, and consumer sectors. Its high returns highlight why the U.S. often remains a cornerstone of global portfolios.
2. QQQ (Nasdaq 100 ETF): 136.27% Total Return (Annualized: ~18.77%)
The Nasdaq 100’s exceptional performance underscores the dominance of tech giants like Apple, Microsoft, and Google. For growth-focused investors, exposure to this sector can significantly enhance portfolio returns.
3. EEM (Emerging Markets ETF): -1.71% Total Return (Annualized: ~ -0.34%)
Emerging markets have faced challenges, including currency volatility and geopolitical risks. However, their longer-term growth potential, driven by demographic and economic shifts, cannot be ignored.
4. IEV (Europe ETF): 26.69% Total Return (Annualized: ~4.86%)
European markets have delivered modest returns, reflecting slower economic growth compared to the U.S. Nonetheless, they offer diversification benefits and exposure to industries like luxury goods and pharmaceuticals.
5. VT (Total World Stock ETF): 56.51% Total Return (Annualized: ~9.39%)
A global approach balances the highs of markets like the U.S. with slower-performing regions, delivering steady returns.
6. EZA (South Africa ETF): 4.71% Total Return (Annualized: ~0.93%)
South African equities have underperformed, largely due to domestic challenges such as economic instability and political uncertainty. Ongoing Rand depreciation has also been a significant detractor when measuring returns in Dollar terms. This highlights the risks of over-concentration in a single market.
The Art of Creating the Ideal Retirement Portfolio
Designing the ideal retirement portfolio requires a dynamic, multi-faceted approach that integrates various investment strategies. Traditional retirement vehicles, such as pension and retirement annuity funds, provide significant tax advantages and serve as the cornerstone of most plans. However, achieving true financial independence often requires thinking beyond these traditional tools.
A balanced portfolio combines tax-efficient retirement vehicles with more flexible, rand-based discretionary investments. These investments offer greater liquidity and adaptability, allowing you to respond to changing financial needs over time. Additionally, direct offshore strategies bring essential diversification, giving you exposure to global growth opportunities while hedging against local market and currency risks.
The key to crafting the perfect portfolio lies in understanding your unique financial goals and circumstances. No two individuals have the same path to financial independence, so your investment strategy must reflect your personal risk tolerance, time horizon, and income requirements. For some, this might mean higher allocations to growth-oriented global equity funds; for others, a more conservative mix of balanced funds and annuities might be ideal.
Regular reviews and adjustments are vital to ensure your portfolio remains aligned with your evolving goals. By adopting this holistic approach, you can create a retirement plan that provides security, flexibility, and the growth needed to sustain your desired lifestyle.
Post-Retirement Income Planning
Once you’ve reached retirement age (55 onwards), you move to a stage of life where deaccumulation rather than the accumulation of assets becomes your primary concern. Said differently, it means investing for income rather than growth. All the money you’ve accumulated in your retirement fund assets (and hopefully others) now needs to be invested to provide you with an income for the rest of your life. And you must also decide between two fundamentally different options. You can either purchase a guaranteed income for life via a guaranteed life annuity, or you can choose an investment linked income in the form of a living annuity.
Further Reading: The Best Balanced Funds for Retirees to Consider
Henceforward Retirement Insights 2025 Report
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Conclusion:Your Future Your Plan
Retirement planning is more than a financial strategy – it’s a roadmap to the life you deserve. By taking proactive steps today, you can build a future that aligns with your dreams and aspirations. Whether it’s leveraging tax-efficient savings vehicles, diversifying offshore, or balancing risk and reward, your journey to financial independence starts now. Remember, the earlier you start, the greater your opportunities for growth. Empower yourself to take control of your financial destiny and make 2025 the year you redefine what’s possible in retirement planning.
Carl-Peter Lehmann
Carl-Peter is a Certified Financial Planner and Director at Henceforward, a leading wealth management and financial planning firm in South Africa. With extensive experience in helping clients achieve financial security, he specializes in crafting tailored retirement strategies that deliver long-term success. Passionate about educating and empowering clients, he combines expert advice with a personal approach to help individuals and families build lasting wealth.
