Approaching Retirement – A Case Study

retirementIf you are approaching retirement age, you may be wondering whether you’re in a good financial position to stop working.

Many people have seen their pensions drop in value since the financial crisis began, and with the current economy’s low growth and high inflation, the value of money is likely to fall over the next few years. To assess your readiness for retirement, compare your current situation to that of Mr Jones, a client we recently helped with retirement planning:

Meet the Jones Family

At 58 years of age, Mr Jones has worked with an NGO for most of his life. He has a spouse who is 54 years old, and children who are about to begin their tertiary education. Unfortunately, over the past five years his income has not kept up with inflation.

Fortunately for Mr and Mrs Jones, the bond on their home is almost paid off. The only cause for concern at the moment is credit card debt, which Mr Jones would like to pay off as soon as possible – he wants to be debt free when he retires in two years’ time at the age of 60. Currently, the total outstanding household debt is R260 000.

Mr Jones currently has a Retirement Annuity with R700 000 in an investment account, various life policies, and small investments. He will also benefit from a small Retirement Scheme provided by his employer.

How we helped Mr Jones to prepare for retirement

  • Our First step was to identify and confirm  all of Mr Jones’ outstanding debt
  • Next we drew up a budget for him with all his income and expenses
  • Because Mr Jones had outstanding debts, the only available cash to settle these had to come from his retirement annuity. According to regulations, a third (R750 000/3 = R250 000) can be drawn as cash up front, with the remaining amount being used to buy a monthly pension.
  • As his income needs are not that great now, and will increase later, we decided on a Living Annuity for Mr Jones. This will allow him to draw an income of between 2.5% and 17% annually. The amount can be changed or renewed on an annual basis.
  • The upfront withdrawal of R250 000 is subject to tax, but fortunately for Mr Jones, the tax threshold is R300 000 – he was able to withdraw the full R250 000 tax-free and settle his debt.

At the end of the process Mr Jones was able to settle his home loan, credit card and sundry debt with only R10 000 still owing to creditors. The monthly pay out from the Living Annuity (at R2000 per month) will be used to settle this remaining amount.

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