By Motlagae Konyana
Most South Africans don’t know how much time is left before they retire and don’t have a financial plan in place to settle debts and start investing. Unfortunately, the majority of income earners will have to seriously downgrade their lifestyles when there is no regular income. It is advisable that you should clear your all your debt by the time you are 45. This allows enough time to boost your retirement fund contributions instead of paying interest to the bank.
By the age of 45, you have only fifteen years left to achieve the goal of being debt-free by retirement. Individuals buying a home at the age of 45 should ensure that the loan term does not exceed 15 years in order to achieve the goal of being debt-free at 60. Homeowners with an existing bond should not be drawing down capital from an access bond, unless there is a plan in place to settle this debt in a 10-year period. This is particularly pivotal if you are looking to use this capital to pay for home renovations or your children’s education.
Short-term debt could derail your retirement planning. Paying the debt off is highly important. Draw up a list of all your short-term debt and calculate the date the last debt will be paid off. If you find that your debts will not be paid in time for retirement, you should make significant lifestyle changes now in order to accelerate debt repayments.
Most breadwinners will be sending their children to university when they are at 15 years before retirement. If there are no savings and investments set aside for tertiary education, don’t be tempted to make additional debt. Be realistic about affordability because children should not have to carry the burden of financially supporting their parents during retirement.
Ideally your children could apply for bursaries, apply for student loans or turn to family for financial assistance. Of course, the main breadwinner could assist in paying off the interest on these loans, but the child should take full responsibility for the student debt when they start working.
It may be tempting to cash in investments that are growing at 10 to 12% per year to pay off debt with higher interest rates. However, this will result in the individuals missing out on the power of compound growth on the retirement investments.
“You may be tempted to cash in R100 000 of your investments to repay short-term debt. If you rather focused on paying off the debt by budgeting and cutting back on your lifestyle, you could probably pay off the debts within five years with a payment of R2 900 per month, or by using your bonuses and tax rebates to pay it off even faster,” says Liberty Financial Adviser, Phillip Kassel.
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