You benefit in two ways. Firstly, by contributing more to your RA, you will be saving more towards your retirement. In simple terms, if you save R2,000 pm over 40 years instead of R1000 per month, you will have double the money in retirement.
But you also score from a tax perspective, because the more you save, the less tax you pay.
Assume you earn R70k pm (R840,000 pa). Your marginal tax rate would then be 41%. Say you plan to contribute 10% to your RA (R84,000 pa). This will qualify you for a tax refund of R34,440 pa which you will receive either monthly (by way of a lower PAYE deduction, if your employer takes your RA contribution into account) or as a refund in the subsequent year, once you have submitted your tax return. Your R84,000 contribution is thus in effect only costing you R49,560 in take-home pay.
If you instead contribute at 15% (R126,000 pa), your annual tax saving would increase by 50% to R51,660. Relative to saving at 10%, your monthly take home pay would reduce by only R2,065 (4,5%) but your retirement benefit would one day be 50% higher! That’s a small short-term sacrifice for a massive long-term gain.
Here’s an idea to achieve an even bigger increase without impacting your monthly take-home pay at all: what if you managed to make ends meet without your annual RA tax refund? This would allow you re-invest the R34,440 refund as an ad hoc lump sum contribution into your RA, on top of your existing monthly contributions.
Based on the above (10%) example, your tax refund would then grow from R34,440 to R48,560 the following year. If you re-invest this again, your tax refund would grow to R54,387 in the third year. All else staying equal (ie ignoring inflation and salary increases), your total annual savings could increase from R84,000 to R142,372 (17% of income), without you having to increase your monthly contribution. The additional portion will simply be funded by your annual refund, topping out at R58,372 in this example.
That additional saving, maintained for many years would provide a massive boost to your retirement income one day.
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