By Philip Geary
Ask the average person what they think retirement will look like, and you are likely to be painted a picture of going on cruises to exotic places, sipping pina coladas on a private beach or enjoying the solitude of game viewing in Kruger.
Sadly, for the bulk of South Africans, this will be an illusion. Most surveys indicate that currently a mere 6% of South Africans can maintain their standard of living post retirement. This article will focus on some of the reasons for this and try to offer solutions going forward.
We live in a world of instant gratification. For many, retirement is something so distant that planning is put on the back burner until it is too late. The notion of saving today for something that will be beneficial in 30 years’ time is not taken too seriously.
A related problem is the amount of job hopping that occurs. In the past, people tended to remain loyal to a single employer, but nowadays the average employee spends more like four to five years in a job. With each move, the individual often cashes in all his or her employee benefits and spends them – not always wisely. Preserving these benefits by reinvesting them is the exception and, while the government has taken steps to mandate the preservation of retirement benefits, there is pending legislation that might allow individuals to withdraw part of their funds. This is only likely to exacerbate the problem.
This tendency to dip into long-term savings has been compounded by the effects of the Covid-19 pandemic on businesses, with staff being retrenched. With no immediate prospects for re-employment on the horizon, many are having to use their retirement benefits to meet their current living expenses.
Understanding where you are
In the past, retirement benefits were defined, and employees had certainty about what their final pension would be. The move to defined-contribution – rather than defined-benefit – funds changed all that. Now, instead of a defined pension, employees have to work out what income their savings would generate. It’s easy to get this wrong.
For example, for a person earning R20 000 per month, a retirement fund of R1 million could seem to be a huge sum. But if he or she wanted to draw the same income of R20 000 at retirement, the capital would not last five years. That might once have been sufficient, but now that longevity is so much longer, a retiree’s capital might have to last for 30 years or even more, assuming a retirement age of 60 or 65.
I look after the affairs of several retirees, and a number of them are either in their late eighties or early nineties. I heard the other day of a retirement home that has exclusive perks for the over 90s club. They recently increased the entry age to 100 because they had too many members!
This increased longevity has come about primarily due to advances in medical technology and a greater focus on healthy living. While it’s great that people are living longer, many are finding themselves in frail care for several years, creating a huge spike in medical bills and living costs.
Against this depressing backdrop, what are the possible solutions going forward?
1. Seek professional financial advice early on, preferably from someone who is qualified, trustworthy and has your interests at heart. The CFP qualification is internationally recognised and demonstrates professionalism whilst adhering to a strict code of ethics.
2. Draw up a budget and stick to it. Keep a record of all your expenses and be ruthless and disciplined in sticking to it. Small savings can have a significant impact: one less takeaway coffee a day could release almost R 1 000 per month. Compounded over 10 years this could have a positive impact on your retirement.
3. Clear all interest-bearing debt as soon as possible. Obviously, things like bonds will be for the long term. Credit cards should be used purely for convenience. Remember the old saying: “Credit cards were created for you to buy things you don’t need, to impress people you don’t like, with money you don’t have.”
4. Differentiate your savings into short, medium and long term.
5. Build an emergency fund which will be sufficient to cover three to six months’ expenses.
6. Your medium-term horizon should be anything from three to 10 years. This could be a deposit for a home, a new motor car or an overseas holiday.
7. Invest for retirement by all available means – do not think that your existing provident fund will be sufficient to build capital for retirement. Use a combination of unit trust funds, both local and offshore. Take advantage of all available tax concessions including a tax-free savings account as well as a retirement annuity, especially for taxpayers at a high marginal rate.
8. Ensure that high-risk, speculative investments such as Bitcoin do not form the bulk of your retirement plans.
9. Review your financial plan regularly with your adviser. You will need to ensure that the funds are outperforming inflation and are aligned with your appetite for investment risk.
10. Post-retirement, be very aware that your drawdowns do not deplete your capital in the short term.
Philip Geary is Wealth Manager at GCI Wealth