Most of us know we should have started saving the minute we began our first job. But when you’re 21, there are more urgent demands on your newly acquired income, like handbags, shoes and rent. It doesn’t get easier to save when you have a family. Before you know it, your 50s loom large and you realise that, like 80% of South Africans, you haven’t made the investments that will allow you to retire in comfort.
Here are five ways to make the money you’re earning now, work for you when you’re older:
1. Invest in a retirement annuity
Your first investment vehicle to consider should be a retirement annuity (RA). You pay a contribution each month until your retirement date. At 55, you are allowed to take a third of the fund in cash, subject to certain tax parameters, with the balance available at retirement for the purchase of an annuity, which then gives you an income. The main advantages of an RA are that your contributions are tax-deductible up to a certain maximum, and all interest and dividend income earned, together with any investment growth, remains untaxed during the build-up phase.
2. Become’a landlord
Buying a property to let has made more millionaires worldwide than any other investment, says Jacques Fouché, CEO of Cape-based IGrow Wealth Investments (www.igrow.co.za). ‘Part of the appeal is that, over the long term, you can achieve a decent passive income through the rental paid, as well as the compounded capital growth as the property increases in value.
3. Become an angel investor
Many of us dream about setting up our own business but never do it. Becoming an ‘angel investor’ allows you a stake in a small business, says Gareth Cotten, an entrepreneur and fi nancial coach who runs short courses (www.getsmarter.co.za). ‘You can either buy a portion of the business, where the idea is to earn dividends from the profi ts generated and also a capital gain over time as the value of the business grows, or simply lend money to the business in return for a fixed interest rate,’ Cotten says.
4. Learn a new skill
Retiring doesn’t necessarily mean ceasing work completely; given the cost of living, many of us will have to do some part-time work to generate a supplementary income. ‘It might not seem like a traditional investment, but paying now to learn a new skill that will generate income in your retirement is a wise idea,’ says independent financial planner Charné van der Walt (www.lemons.co.za). ‘
5. Rent out a room
It’s all very well talking about making investments for retirement, but you need to have the money to do it. As children get older and leave home, an empty room or flatlet can generate income if you take in a tenant. The rent could then be used to invest in one of the income-generating vehicles above.
Text originally appeared in Good Housekeeping August 2012.