Over the last two months, the world has undeniably changed. Many individuals and businesses are relying on their financial resources to pull through. Markets have contracted, our financial resources have been depleted, and uncertainty is at historic highs. Our narratives have changed and how we think about ourselves and others, what and how we buy, how we move (or perhaps not move), how we work and how we communicate have all changed. Many of us will only experience a wide-ranging adjustment like this again when we retire.
The chart below (dated at the market lows of March 20 2020) is a rare sight and presents a challenge every investor faces to do better financial planning (both pre-and post-retirement). This is important, firstly to secure our futures, and secondly, so we are positioned to help others in the next crisis.
Equity market indicators
Source: PSG Wealth
Life will most probably not be as simple as before. Work opportunities globally have been impacted, and debt ratios will increase (the US and the EU are embarking on the greatest monetary stimulus programs ever). Government taxes will increase (in the absence of economic growth) on a global scale, to counter these new debt levels. We should also consider that a renewed focus on addressing global poverty may require additional funds. These trends could constrain future business profits and result in lower investor returns – reduced capital growth and dividends (after-tax profits).
Retirement planning historically vs the future
Retirement planning in its current form has been outdated for quite a while now. The reasons for this are elevated levels of modern lifestyles, longevity, weak work continuity (preservation), no employer retirement contributions and raising tax trends. I believe there is also a structural change taking place globally, requiring businesses to now focus increasingly on the sustainability of their businesses and consider and manage the environmental impact of their operations.
A combined approach to future retirement planning
Covid-19 has also brought forward some permanent and temporary changes to the retirement industry. The temporary changes will be overcome, as before, by human ingenuity. The ramifications listed below are in my mind more permanent of nature and have now substantially grown in prominence as a result of Covid-19.
- Individuals are mostly not supported in accumulating their retirement provision. An increase in individual retirement contributions is required since more and more businesses are cutting back on employee retirement contributions, according to John Anderson of Alexander Forbes.
- Extending the lifespan of your “economically active” chapter will require very specific and accurate career planning. In the “new” world it is already clear that certain careers and industries (tourism, hospitality/food, logistics, advertising, retail, property utility) will undergo a substantial makeover. Individuals focusing on reinventing their skillset/thoughts have a greater chance of staying relevant and employable. Consider:
- Creating additional networks outside of work;
- Broadening your knowledge and skillset; and
- Training your mind informally to stay opportunistic and think creatively.
- Reconsider the starting point and format of your retirement (semi-dependent/fully dependent). The biggest two considerations that determine a successful retirement are the duration and level of financial dependency on your accumulated retirement funds. To fully retire at 60 or 65 is in steep contrast to new findings that suggest your most productive years could be after age 60. Aspire to deal with many bucket list items during your economically active phase (naturally within your financial means).
- Reduce the chances for financial mistakes through prudent, independent and dependable financial advice. Avoid jumping around chasing different investment ideas with unsustainable return expectations. Rather, aim for above-average investment returns at appropriate levels of risk. Investors should also evaluate their performance in terms of their level of investment contributions, instead of pushing for unrealistic levels of return from financial markets (forcing decision mistakes).
- Ensure a healthy lifestyle as this is one of your biggest threats that can derail your ability to earn an income up to the point of financial independence. Increasing fragility is part of ageing, but chronic illness (caused by poor lifestyle choices), will inevitably complicate your retirement/finances.
- Attack individual silos of debt in order of the highest interest rate to the lowest (e.g. credit card/retail accounts, motor finance, mortgage). Globally, interest rates are at record lows (see STANLIB chart below). Our recent 2% interest rate cut provides an ideal time to kick this debt plan into action.
- Tax optimisation is growing in prominence due to the increased debt burden we can expect from governments. Use a specialist to be 100% tax efficient and do not underestimate the impact of large, once-off tax penalties on future growth.
Step up and adapt
Individuals and industries are challenged to adapt by Covid-19. Diligent, disciplined and continuous financial planning can help you get into better shape, for when you decide to retire one day. Failing to plan financially, as many retirees can testify, will inevitably result in a “lock-down” experience during the last days of your life.