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Following the Golden Goose or Creating a Golden Egg?

  01/12/10 08:06, by Len, Categories: Retirement Planning, Tax Optimisation

Source: Article by Allan Heynen, Director: BDO Spencer Steward

With a plethora of retirement products and options to choose from, perhaps the most challenging aspect of planning for these critical years is recognising that your retirement package cannot and should not resemble everyone else's. By taking your unique set of needs and goals into account when planning for retirement and selecting your basket of products accordingly, you will ensure that you're building a golden nest egg – as opposed to chasing everyone else's golden goose…

Identifying how much one needs to retire on and putting a plan in place to achieve this has to be recognised as having everything to do with who you are as an individual – and kept completely separate from what everyone else in your age group is doing. While peers and colleagues will no doubt be following product and savings “trends”, it is critical to realise that as individuals we each have very unique needs and goals when it comes to retirement. These have to form the basis of one's retirement planning. They must additionally be fundamentally linked to how this plan will be put into action. As such, one has to take a critical realistic look at the products and means of saving on the market – and determine what is appropriate in one's personal capacity and context, taking a number of factors into consideration. In this way, you will identify the most appropriate savings vehicle available for you.

Tax is the first factor to take into account in terms of product evaluation. While one must identify that X amount is to be “invested” for retirement purposes, remember that each product brings with it different tax considerations. An endowment policy for example, pays tax within the fund. This makes it inappropriate for low income earners or those without significant taxable income. In a similar way, a retirement annuity might be more appropriate for high income earners in this instance, thanks to the tax deduction they would be entitled to.

Costing is equally important. After selecting what one believes to be the most appropriate vehicle and taking into account the tax considerations, one needs to look at which products would be the most cost-effective. Retirement annuities for instance are sometimes still front-loaded with costs, where all costs are paid for by the investor upfront. This can work to one's detriment should you cancel the RA early. Although this is being addressed by legislation and penalties will be capped in the near future, this is still a significant cost to incur. Costing needs to be addressed for each asset class when considering which of these to invest in.

When planning for your retirement then, by taking tax, cost and other considerations into account, you will be able to select the investment and savings vehicles that are both appropriate for you as an individual and relate to where you are at this point in your life, as well as how you want to retire. In this way, you will ensure that you can budget for your life plan and goals while simultaneously putting sufficient away to create the ideal golden nest egg for your future.

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