By Deidré Valentine
26 April 2025
When it comes to South Africa, people often focus only on the negative aspects, overlooking our beautiful landscapes, great sense of humour, delicious food, and good-hearted people. In much the same way, retirement planning is often discussed only in terms of the “doom and gloom” side, rather than exploring the more optimistic side of the story.
I’m not ignoring the harsh realities but rather trying to highlight that there are two sides to most stories—and sometimes, we’re simply too afraid to engage in conversations that focus on the positives, even if they come from the minority.
Although the majority of South Africans are currently not making sufficient provision for retirement, there is a small group of individuals who have been remarkably disciplined—some might say too disciplined—in saving enough funds to realise their retirement dreams.
What is considered sufficient?
Let’s take a step back. How do you know if you’ve saved enough for retirement? One can never be completely sure. But let’s say I ask someone to draw up their retirement wish list, they might typically give me the following:
- Monthly income needed for expenses: R75,000 (increasing annually with inflation)
- Medical aid: R8,000 per month (increasing annually at 3% above inflation)
- Holidays: R100,000 per year for the first 10 years of retirement
- Vehicle replacement: R500,000 every five years for 20 years post-retirement
- Inflation assumption: 5.5%
- Funds need to last until age 95 (client is retiring this year at the age of 65)
- Investment growth assumption: Inflation + 5% (for a balanced mandate)
To provide for these needs, a lump sum of R17 940 928 would be needed today. Now let’s add a buffer—an extra 30% to cover unforeseen events. That brings the required amount to around R23.3 million.
Now, imagine the client is in the fortunate position of having accumulated R30 million. That’s a surplus of R6.7 million. Remember, the assumptions were already generous, so it’s highly unlikely this client will need that surplus.
Meanwhile, the excess, invested in a balanced portfolio, is expected to grow at about 10.5% per year, meaning it will likely double every 7 years. By age 95, this surplus could be worth approximately R133 million (roughly R27 million in today’s terms)—a significant sum.
What to do when your retirement funds start to “take on a life of their own”?
If you’re currently in this position or can see that your retirement planning is heading in that direction, it’s important to consider the following points as you and your financial adviser approach your planning holistically.
Estate Planning
Given the numbers above, if the assets are not in the appropriate investment instruments, the client could end up losing about 25% of their wealth to estate duty.
- Retirement annuities (RAs) are exempt from estate duty, so a large portion of the client’s investments should ideally be in their personal name.
- For discretionary investments (which are often more tax-efficient from an income tax perspective), it may be wise to draw income from these first to reduce the estate’s value during the client’s lifetime.
- Trusts can also be a very effective tool to shield against estate duty. Ideally, one should start building investments within a trust at a younger age, so that the capital growth occurs within the trust and not in your personal estate.
- However, for clients whose children live abroad, a trust might not be the best option. In such cases, something like an offshore endowment could be more suitable.
Investment Structure
It may make sense to treat the surplus funds as a separate pool and invest them differently from the main retirement income pool. This surplus can be invested more aggressively, possibly incorporating alternatives like hedge funds for diversification.
Property can also serve as an alternative income source, but it must be considered in conjunction with income from a pension fund or retirement annuity to ensure your total taxable income doesn’t result in unnecessarily high taxes. Rental income from property (if unbonded) is fully taxable for purposes of income tax.
Life insurance is often no longer necessary, except in rare estate duty scenarios where there’s a lack of liquidity. During retirement, spending money on life insurance premiums may not be worthwhile.
You may want to consider supporting your children financially now, instead of leaving them an inheritance when they’re older, perhaps even retired themselves, and may no longer need the money.
Finally, when it comes to retirement planning, there are many balls to juggle, and it should not be taken lightly. Our decisions can have significant financial impacts, and all potential outcomes should be considered in collaboration with an expert before making a decision. Planning carefully, especially regarding tax and structures, can lead to a much better outcome for you and your descendants.
Deidré Valentine is a certified financial planner at Woodland Wealth. Contact her at info@woodlandwealth.co.za.
Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.