Heading towards too much time, with too little money

About 94% of individuals are unable to retire independently and maintain their living standard straight after retirement.

Adjust your savings and investment plan today. Give up on seeking the lifestyle advertising promises and cut down on spending. Action is required now. There is a retirement financial dependency and time horizon awaiting that you possibly cannot imagine.

Sounds dramatic? It’s the truth. It’s a well-publicised fact that about 94% of individuals are unable to retire independently and maintain their living standard straight after retirement. Even fewer retirees can maintain their living standard, ten to 15 years into retirement.

The conventional pre-retirement guideline was historically described as a ’40-year project’, by contributing 15% or more of gross income (after administration / risk cover fees / premiums) to a pension plan. Should investors choose to only dedicate 30 years to this project, the required contribution rate of gross income shoots up to 30%. Considering providing / saving only for 20 years? The required contribution is then an astonishing (almost) 60% of gross income required for saving, according to calculations by asset manager Allan Gray.

That kind of planning was typically based on the expectation that men will live to about 60 to 70 years of age and women to 70 to 75. Global news services reported in June this year that there are currently 450 000 people worldwide who reached 100 years of age. More alarming (from a financial planning point of view) is that one news website reported that this is currently the fastest growing age group.

What this means is that fewer and fewer people will achieve financial independence – being able to cover their expenses from their retirement savings until they pass away.

In the financial services industry, locally and globally, there is a strong focus on performance and also a lot of publicity around fees. While these are important issues, a key message should be that individuals should save more, way more, and there should be emphasis that this should start as soon as possible. Also, the notion of retiring from active earning at age 60 or 65 should be scrapped. Even individuals who diligently saved and invested, may find that they will have more years than money if they live to 100. Retiring at age 65 could require enough money for another 35 years.

The most important factors, determining whether an individual will retire successfully, are:

  • The size of contribution and contribution escalation rate;
  • Period of contribution;
  • Returns received; and
  • Length of the retired dependency phase.

Against this background it is critical to do the following:

  • Budget monthly.
  • Evaluate spending versus benefits. Do not be caught up in the lifestyle trap portrayed in advertising, on social media … or by your neighbours or colleagues.
  • Immediately start with a savings debit order (with a steep annual increase).
  • Delay the replacement of assets of a capital nature when paid off (delayed gratification e.g. houses / renovations / cars / technology, even clothing).
  • Partly invest surplus funds (bonuses, commission, in fact any additional income).
  • Set financial goals and reward yourself on achieving them.
  • Maintain a conservative living standard.
  • Get the real facts. There is no ‘one size fits all’ financial plan. Every individual’s situation is different. One person may be able to maintain their current lifestyle with say R3 million in savings (assuming there is no debt for housing or a car). Another may find that R20 million is not enough when international holidays and new cars are still frequently on the retirement wish list. A financial advisor will be able to provide guidance on the required monthly retirement contribution to achieve financial independence. Many individuals are contributing say R3 000 per month, where a contribution of R13 000 per month is required for retirement at age 65 / 70.

Beyond setting realistic goals and getting a savings and investment plan in place, an advisor can also:

  • Help you to take on higher but manageable levels of risk, which over the long term translate into substantially superior returns.
  • Encourage you to stick to your investment plan when in doubt (persevere).
  • Prevent you from making financial mistakes that can cause permanent loss of investment capital.
  • Devise an investment plan that is cost- and tax efficient.
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