Few retirees realise that the fees they pay on their living annuity could well be their single biggest expense in retirement. A 2% fee, for example, on a R5m annuity amounts to more than R8,000 per month. Saving for investment requires building a transparent and diversified investment portfolio as early as possible that will support you and your family’s long-term financial stability.
It is vital to have a clear understanding of the associated fees and whether your investments are placed correctly to accumulate positive returns over times. Fees can be one of the biggest detractors from reaching your retirement goals. One also needs to consider rising inflation and annual fee increases.
Planning for the future
Retirement savings are expected to stretch even further as the average life expectancy in South Africa has increased. This is according to a Statistics South Africa 2022 report, the current average life expectancy for South Africa in 2023 is 62.8874 years of age. A 2.29% increase from 2022, when the average life expectancy was 61.4798 years, from birth to death. In the future, South Africa’s average life expectancy is projected to increase to 76.4271 years of age, by the year 2100.
It is important to look at various providers and evaluate the rates, the structure, and whether or not an upfront payment is required. A difficult decision can be made easier by asking the right questions such as retirement age, funds required to support your lifestyle and those of your dependents, and what value will you be getting out of your retirement portfolio.
Many people are now looking to retire later in life than planned, and some stating that they don’t even plan on retiring. Without inadequate financial planning in a tough economic environment that is expected to force South Africans to continue to tighten their belts; this means that many people will need to further reduce their spending and even compromise on healthcare.
Many retirement investors therefore underestimate the fees on their living annuity, or rather, the impact these fees will have on the longevity of their savings.
There are generally three types of fees that apply to a retirement fund:
- An administration fee – This is charged by the financial services provider to administer an investor’s monthly contributions. This would vary in terms of the monthly contributions. It is calculated based on a percentage of a member’s salary, and is deducted from their monthly retirement contribution.
- An investment management fee – This fee is charged for managing a member’s retirement investments and is levied as a percentage of the member’s assets in that portfolio.
- Financial advisor fee – This cost is between the investor and a private financial advisor, it can be charged either as a percentage of contributions, assets or a combination of both.
It is recommended that a retirement investment plan is discussed with a licensed financial consultant to ensure that any product selected is appropriate for the investor’s risk profile, objectives, financial needs and retirement plans.
When considering a retirement product, it’s crucial to understand how the fees are calculated, and what actual returns you will achieve over time.
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