Retire at 60 or 65? What the extra five years actually buys

Three things happen when you work five more years

The choice between 60 and 65 is not only about the pot getting bigger. Three effects stack up, and they all point the same way:

• You keep contributing. Five more years of retirement fund contributions, usually with an employer share and a tax deduction.
• The pot keeps growing. Five more years of returns on the whole balance, not just on the new money.
• You draw for fewer years. The money has to last from 65 instead of from 60, so the same pot can safely pay more each month.

The example

These are assumptions to show the method, not a forecast. Everything is in today's money, so inflation is already taken out.

• Pot at 60: R2 000 000.
• Contribution: R6 000 a month (employee and employer together), kept up until 65.
• Return: 4% a year above inflation.
• Income: 4% of the pot in the first year - a common starting point for a draw that aims to keep pace with inflation.

What five years adds

• Growth on the R2 000 000: R2 000 000 x 1.04⁵ = about R2 433 300.
• Contributions with growth: R6 000 a month for 60 months at 4% a year comes to about R397 100. You paid in R360 000; growth added the rest.
• Pot at 65: about R2 830 400 - 42% more than at 60.

Most of the gain comes from the existing pot growing, not from the new contributions. The bigger your pot already is, the more the extra years are worth.

What it means for your monthly income

• Retire at 60: 4% of R2 000 000 = R80 000 a year, about R6 667 a month before tax.
• Retire at 65: 4% of R2 830 400 = about R113 200 a year, about R9 435 a month before tax.
• The difference: about R2 770 a month, every month, for the rest of your life - in today's money.

And the comparison flatters the early option. Retiring at 60 also means drawing about R400 000 (five years of R80 000) before 65, and the pot has to last five years longer. A pot that must last 35 years generally supports a lower draw than one that must last 30.

Where the early option can still win

• Health and time. Five years of good health at 60 to 65 may be worth more to you than a higher income at 80. That is a real trade, not a mistake.
• A part-time middle. Earning even R10 000 a month from 60 to 65, and drawing nothing, captures much of the benefit of retiring at 65.
• If your job may end anyway. Retrenchment at 58 or 62 changes the maths; plan for the possibility rather than assuming you control the date.

Tax and the rules at retirement

• You can retire from a retirement annuity from age 55. A pension or provident fund follows its own rules on retirement age.
• Retirement lump sums have their own tax table. A first slice is tax-free over your lifetime, then rates step up; check the current year's table on SARS before you decide how much to take in cash.
• A living annuity lets you draw between 2.5% and 17.5% a year. The higher the draw, the faster the pot can run down - see our living annuity drawdown post.
• Your two-pot savings component can be taken as cash at retirement - see how the savings pot refills.

We used a 4% real return and a 4% starting draw to show the method. Neither is a guarantee, and your own fund's costs, returns and rules will give different numbers.

Sources

• SARS, retirement lump sum benefits tax tables - sars.gov.za.
• National Treasury, two-pot retirement system - treasury.gov.za.
• SARB, inflation targeting (why we work in today's money) - resbank.co.za.
• Calculations: compound growth at 4% a year above inflation; contributions treated as monthly with growth at the equivalent monthly rate (MaxWealth workings).

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