Question: I am 50 years old and have no savings or a pension fund. I want to retire at the age of 65. What should I do?

Answer: First, work out how much money you will need to live on when you retire. You should look at your current budget and identify those items that are likely to increase and those that are likely to decrease when you retire. This will give you the after-tax income you will need when you retire.

Second, calculate how much capital you will need when you stop working. 

You must multiply your monthly budget by 12 to get the annual amount you will need each year. You should then divide the annual amount by 0.05 to get the amount of capital that you need. (We do this because 5% is the recommended drawdown rate on a retirement investment for a 65-year-old.

I have given some examples in the table below. So, if you need a pension of R25,000 a month, you will need at least R6-million in savings. I have not taken income tax into account, so the capital needed will be higher than the numbers in the table.

Third, start investing aggressively in order to close the gap. As you are in your fifties, you’re probably paying the most income tax that you have ever paid. I would therefore recommend that you invest as follows:

Retirement annuity

You can invest 27.5% of your taxable income (up to R350,000) into a retirement fund and have this investment come off your income tax. You will effectively get an immediate subsidy on your contributions that is equal to your marginal tax rate. So, if your tax rate is 40%, an investment of R100,000 will effectively cost you R60,000.

Tax-free investment

You are allowed to invest R36,000 a year into a tax-free investment. The advantage here is that, in time to come, you may make tax-free withdrawals from this investment.

Discretionary investments

These would typically be investments in unit trusts or specific portfolios. Any drawdown you make would only attract capital gains tax. This can reduce the amount of tax you pay when you are on pension.

Wrapped products

If your tax rate is higher than 30%, consider investing in an endowment or sinking fund structure. After five years have elapsed and the investment has matured, you may make withdrawals from it that are free of additional tax.

I would recommend that you speak to a financial planner who can help you to select the right combination of products to use at this crucial stage of your financial journey. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.