By Denay Valjee head of distribution and marketing at Hollard Investments
Dreams about being able to travel when you are retired can come true with a bit of planning and saving.
Of course, the best option is to start saving for retirement-era holidays long before you begin to contemplate your retirement era. But, even if you’ve already retired or are set to do so in the next few years, it’s not too late to turn your dreams into reality.
Most people save for their retirement by investing in retirement funds, through which they receive an income in retirement (known as an annuity) that mirrors a salary. Once retired, a more effective way of saving for holidays may be to put a portion of that income into more flexible investment products such as unit trusts or an endowment policy, both of which Hollard Investments offers.
Unit trusts provide investors with flexibility and access to savings at any time, whereas endowment policies have some restrictions but are generally tax-efficient, also providing significant estate planning benefits. If you pass away before the investment matures, your beneficiaries can receive your investment immediately, and there are no executor’s fees.
While both products have liquidity benefits, unit trusts are especially beneficial on this score. During the first five years of investing in an endowment policy, you can only make one withdrawal. After the five years have passed, endowment policies allow you to withdraw funds at any time. Unit trust funds are generally available within a few days following a withdrawal request at any time of the investment.
This means that if you are retired, it might be prudent to use unit trusts to fund your holidays until your endowment policy’s five-year restriction period has passed, and then switch to using the endowment, given its tax efficiency, to pay for your travels. It’s important to remember that an endowment policy allows you to take advantage of the tax benefits even after the investment matures.
An investment into an endowment policy also allows you to select your choice of investment portfolios, which can generally be customised to your specific needs. Because the income tax rate in an endowment is fixed at 30%, your returns within your investment will be taxed only at 30% and capital gains at only 12%, no matter what tax bracket you are pushed into by income from other sources.
Both investment vehicles allow you access to the lump sums needed for travel when you are retired. Of course, when determining the size of these lump sum withdrawals, it’s important to make provision for a few extra travel-related costs, so that you are also covered for unexpected expenses.
The million-rand question is how much money to set aside every month. It’s difficult to say at a general level what percentage of your overall retirement funding you need to set aside for travel because every individual is different. The calculation is affected by where you want to go, how you would like to travel and when you want to take your holidays.
While a rule of thumb when it comes to retirement savings is to plan to maintain the lifestyle you currently enjoy, travelling more in retirement may well mean cutting back on some aspects of the life you now live. Whatever your situation, it’s important to discuss your plans and aspirations with a broker or financial adviser who can help you structure a savings plan that may make your travel dreams come true.
It’s wise to create dedicated travel savings that you mentally ringfence. This will help you avoid dipping into funds that are dedicated to your day-to-day expenses, and you are less likely to compromise your overall financial security for that dream trip.
When you sit down to calculate what percentage of your retirement income should be set aside for vacations, think about what type of trips you will want to take when you are retired, taking into account that your travel needs may change. In your working years, a holiday is likely a time to relax and recharge, while when you are retired, you might want to swap the rest and relaxation for travel that expands and excites your mind.
You also need to consider how often you want to travel, and whether you want to venture beyond South Africa’s borders – this obviously has an impact on your travel expenses. So does how spontaneous you will be – if you are open to being flexible about when you travel, you can take advantage of last-minute deals and off-peak rates.
Don’t forget that there are many ways to cut travel costs, such as using the perks that come with medical schemes and credit cards or buying into a timeshare. You could consider renting out your home while you are away to draw in extra income, turning a hobby into an income-earner or setting up a holiday club with friends and taking advantage of the discounts that often come with group travel.
You don’t have to give up on travel when you retire. You just have to plan more carefully.
