Could investing your annual bonus take years off your retirement age?

Last updated on 30th November, 2023 at 11:22 am

Before you use it to splash out on festive season gifts and entertainment, consider how investing your annual bonus could make a positive impact on your retirement instead.

Reading time: 3 minutes

In this article you’ll learn:

• How an annual bonus can get you closer to your investment goals if used wisely.
• About our retirement calculator, which you can use to find out how much to save regularly for retirement.
• Why it’s important to partner with a financial planner if you’re thinking about investing your annual bonus.

Understanding an annual bonus or ‘13th cheque’

If you earn a salary, your employer may pay a bonus as a financial incentive for retaining employees and/or good performance. Performance bonuses, for example, are based on outputs either by individuals or departments.

Annual bonuses are different. The Labour Guide says these are categorised as a ‘gratuity’ to recognise a job well done, and are usually paid along with the 12th salary, hence the popular term ‘13th cheque’.

Annual bonus + time = future rewards

While a bonus is intended for spoils over the festive season, many people use it for expenses like paying off debt and preparing for the school year ahead.

Jyoti Gopee, senior financial planner at Pinnacle BlueStar, authorised by Sanlam, suggests another savvy use for it: making a once-off payment into your retirement annuity (RA).

Your invested bonus, plus time, allows you to get to your retirement savings goal a little sooner. The key ingredient here is compound interest: it loves time, and the more you give it, the more it works on your investment, rewarding you with growth on the interest you earn.

You can use the Sanlam Reality retirement calculator to find out how much you need to contribute to reach your retirement goals.

Is early retirement all that?

It can give you more years to spend with loved ones, pursuing life-long goals and enjoying the flexibility and relative stress-reduced life of a pensioner, but with more vitality.

On the other hand, you’ll reduce your number of income-generating years and increase the number of years that your savings need to last. This is why planning for retirement is crucial to making your savings and age work for you.

If you’re considering taking an early retirement, read this article.

Invest in planning

“Understanding the effects of compound interest is important; however, completing a Retirement Planning Analysis with your financial planner is even more important,” explains Gopee. This is a discussion with your financial planner so they can understand what your needs are likely to be at retirement. It’s done when you start your retirement annuity and should be reviewed every one or two years.

“Once your financial planner has determined your retirement income and capital needs (while taking the future value of money into account), they can present a retirement savings solution tailored to provide for your desired lifestyle,” adds Gopee.

The difference that investing your bonus can make

There is a benefit to giving your long-term savings a once-off boost by investing a lump sum in addition to your recurring contributions. Let’s consider the possibilities for 36-year-old Sindi*.

When she invests her bonus of R15 000, her savings will grow by an extra R129 500 by the time she reaches age 55. That’s the equivalent of around seven years’ current regular monthly contributions in future value. Delaying retirement further allows her savings pot to grow even more: by R807 260 by the time she reaches age 65.

*Sindi is not a real person. We have used her scenario to illustrate how investing a lump sum can help grow retirement savings in the long term.