wealth creation tips for retirement income

General tips for wealth creation NB not fool proof.


Wealth creation is extremely difficult (if not impossible) with the traditional ‘save for retirement formula’. The personal savings strategy has passed its sell by date to say the least, and yet it is still the most popular method used by employees to plan for the future.  

The strategy is very simple. Before you get your salary every month, your company makes a contribution into their pension fund on your behalf. The objective of the fund is to maximise the return on your contributions so that when you retire you hopefully have a decent pension to live on.

There is a major problem with this approach:


Pension fund savings are too little. In South Africa for example, an employee typically contributes 10% of his or her gross income. If an employee earns R10,000 a month, the employer will transfer R1,000 into the fund. The expectation is that the monthly savings will grow to a handsome amount after a number of years and provide a good standard of living during retirement.


But that rarely works out. Let’s have a look at a simple example to demonstrate. If you haven’t done so already, download the ‘Are you saving enough for retirement?’ calculator.

Suppose you are 30 years old and would like to retire at 65. Your current monthly income before expenses and tax is R10,000. Your goal is to earn the same amount when you retire by making 10% fund contributions. You believe your retirement funds should last for 20 years. 

What must you save on a monthly basis if you want to maintain your standard of living during retirement? (In other words, earn R10,000 per month for 20 years from age 65 onwards).

For the purposes of simplicity we’ll ignore the effects of tax and inflation. To maintain your lifestyle at retirement, you will need R2,4 million. Required contributions are R5,714, which is more than half your current income! This leaves a savings shortfall of over R4,500 per month. Not good.


The short of it is that a R1,000 pension fund installment is just too little.  

How could one solve this problem?

One clear option is to save more, and because pension funds limit your contribution, you will have to take your personal savings to the extreme. Here’s how:

1. When you receive your after-tax income at the end of the month, the very first thing you do is pay yourself. Forget about your normal expenses or entertainment budget. First buy assets and then look at your other commitments.

2. When I mean pay, give yourself a ‘golden handshake’. Really cough up! Instead of placing a few dollars into a savings account or retirement annuity, take 60 to 75% of your salary and buy income generating assets. That leaves you with 40-25% of your salary to get you through the month. 

Personally, I have not come across a person who saves 75% of his or her monthly income, but I have met a few individuals who save half of what they earn. Can you save that much? Are you able to take your personal savings to that level?

The advantage is that you can create wealth by simply saving a lot. In our example above, if you save R5,714 every month, you may be able to retain your standard of living at age 65.  

The problem is that not everybody can do this. People need to live, especially when they have a family to support. And if this looks like an attractive option to you, I’d like you to consider something else first – inflation.

In the real world, the above strategy will only work if your savings outgrow inflation on an annual basis. So asset selection is very important. Whatever the asset, just make sure that you give yourself the best chance to beat the cost of living.

Instead of savings most of what you earn, we suggest one of the following:


Build a business that requires little working capital. A perfect example is an online business. The world is going digital and the information boom is driving the cost of doing online business to new low levels.


Leverage your savings. Borrow what you don’t have. Banks are pretty open to this when it comes to property. But given the tough economic times, not every bank is going to finance your next investment property. It also depends on your personal financial position.


Find a business deal that generates superior returns. Let’s say you want to buy a  franchise that generates a healthy cash flow. Would you be willing to save 75% of your income on a regular basis until you have enough capital to purchase a franchise that generates a business return of 30% (for example)?


Design a strategy that incorporates all three steps above. Build a low cost business. Use other peoples’ money when necessary. Be very selective with the market. You want a market where people are willing to pay for your service.


Source: http://waytowealthpro.com/
Tags : Weatlh creation, savings tips, business start-ups