Here’s something you may not have thought about when you celebrated your 40th birthday: You’re almost as close to traditional retirement age as you are to your high school graduation. It’s true!
The year most of us turn 41, we’re mid-way between receiving our matric certificate and receiving our gold watch (if they still gave out gold watches for retirement). Whether you’re living pay cheque to pay cheque, month to month, or have been blindsided with unexpected expenses, hitting the big 4-0 with nothing in the bank for retirement isn’t ideal. You may be asking yourself, how did it get to this? If life begins at 40, what have I been doing all these years? Before we get into what you should do about it, this might make you feel a tiny bit better: lots of other people are in the same predicament. Most South Africans are not prepared, financially, for their retirement years. Only 6% of South Africans save up enough for retirement according to the World Bank.
It’s seen as a risk for the country’s economy, as many citizens would then rely on the government to subsidise them in the later years of their lives. Our retirement savings rate is poor and it shows the bad attitude, and little discipline, we have towards retirement as South Africans. Many will point to the persistant inequality in wealth that cuts through society, almost defining who we are as a country. A lingering and unwanted socio-economic inheritance from Apartheid. I can’t argue against that.
About 55% of people in our country live in poverty and that’s a reality not an excuse. That being said, for those who aren’t in that situation and have anything resembling a middle-class life, you must do something to save yourself because nobody else will. Most South Africans simply don’t save, and many of those who do, only put money into funeral policies. Some people decide to cash out their pension when they change jobs, putting their retirement years at risk.
Regardless of your why, it’s not too late to take a hard look at your finances, devise a plan, and get some money in the bank. Here’s a three-step guide to turning the ship around.
Step One: Crunch some numbers to outline a basic retirement plan
To create a retirement plan that will guide you going forward, you’ll need four key numbers:
- the age at which you want to retire;
- the number of years you’ll depend on your retirement savings;
- an annual estimate of living expenses in retirement; and
- your current savings.
While many people think of 65 as the “normal” retirement age, it’s not a definitive age. As people live longer, some choose to work into their late 60s and beyond. Considering your age, salary, expenses and how long you’re likely to live, you can figure out what age is a realistic retirement target.
Remember to consider any potential income you might have in retirement. Will you depend on a government grant, family, friends…your children? Estimate your retirement expenses, focusing on big-ticket bills like food, housing, utilities, transportation and health care. Now run your numbers through a Retirement Calculator. There are countless such calculators online and a simple Google search will help you find one, if you don’t have a qualified adviser to turn to. Enter your age, salary and lifestyle details, and it creates a graph that shows your estimated retirement income and projected living expenses, as well as any gap between the two.
How much money should you be saving? Be prepared for a wake-up call! You’ll quickly realise you’re in the realm of having to aim to save 17% of your annual income — and that’s assuming you already have some money in the bank. The reality is not pleasant but you can’t change it until you face it. Once you determine how much you need to live on, you can start making adjustments. Those who wait until their 40s to start saving need to be aggressive. That’s not to say you can get yourself to where you would have been had you been planning for retirement since the beginning of your career. But if you make retirement planning a top priority in the time you have left in the workforce, you should at least be able to recoup some lost ground. And you’ll certainly be able to retire in better shape than if you do nothing.
At this point you may be asking yourself, where is that money going to come from? Seventeen percent of my annual income!!!! Let’s not sugar coat this. By virtually any standard you are far behind. Someone your age should have savings equal to roughly five times annual salary to be on track toward replacing 70% to 80% of pre-retirement income after retiring. There’s no magic bullet here. No “Make Up For 20 Years of Not Saving” investment fund that will generate blockbuster gains and power you to a big fat nest egg. If you’re going to have any shot at turning your situation around, you’re going to have to do something that you clearly haven’t done to date: SAVE. As much as you can. Starting right now.
But enough of where you should be. Let’s talk about ways to get you where you want to be, that is, in a position where a reasonably secure retirement is at least a possibility. With that in mind, we look at step two because now you must make some serious lifestyle changes.
Step Two: Assess and trim your living expenses
It won’t be easy. You’ve been living on 100% of your income (minus whatever Sars and other tax authorities siphon off). So, this is going to require a dramatic change in your lifestyle. But there are a variety of techniques that can make you a better saver provided you’re willing to follow them. If you’re not willing to make the transition from a spender to saver, then in the absence of rich, accommodating relatives or hitting the lottery, you’ll have to reconcile yourself to living on a government grant, which will barely cover the basics. Seeing a gap between your estimated retirement income and living expenses can be sobering. To start closing that gap, let’s take a hard look at your spending.
Categorise your expenses into “needs”, “wants”, and “savings”. Needs are essentials like food, housing and utilities. Wants are less necessary expenditures like clothing, travel or entertainment — and they’re your first target for cuts. Slash spending from your “wants” category by identifying and cutting out unnecessary expenditures. Don’t be too harsh, since eliminating everything you enjoy is unsustainable, but be as ruthless as possible. You might not quit Starbucks coffee cold turkey, but maybe you can brew their beans at home instead of hitting the drive-through every morning.
Next, target your “needs” to see what can be trimmed. Consider other small changes, too, as those can add up to a big difference. Can you do the garden yourself or clean your own house as opposed to having hired help? What about making your lunch at home and not buying from the canteen every day, or cook more at home and not eat-out? Have you checked your home assessment for a chance to lower your property taxes (although if your home is depreciating in value, you have other problems for another article on another day)? If you’re ready for a big change, consider downsizing your home. Buying a cheaper residence frees up more of your money and often decreases your bills. Take a step back now so you don’t suffer in your golden years. You really don’t want to be broke when you’re 70 years old. Bonus: not all your stuff will fit in the new place, and that might be a good thing. Sell it for extra cash.
Savings aren’t immune, either. While you might not have banked any money towards retirement, you might have been planning for a vacation or a new car. Earmark that money to your retirement instead. You know those little windfalls you come into every year, like income tax refunds, overtime pay and bonuses from work? Put them to good use by adding them to your retirement savings. Since it’s not money that you’re counting on to get by, it won’t hurt to stash it away.
Finally, if you’re still supporting your adult children, it’s time to tell those mooches they’re on their own. It sounds harsh, but they have many more years for their own financial planning. Total the amount you’ll save each month from these changes. First channel all these funds into paying off your debt (except for your home) and to having a fully funded emergency fund (three to six months of expenses). The solution to getting out of debt and getting started on your retirement goals is the same as for folks who are already debt-free: GET ON A BUDGET. Your priority is to get out of debt as quickly as possible. Set retirement saving aside for now. Budget for the basics then tackle your debt using the debt snowball method. Once you are debt-free, you’ll be a pro at budgeting. All you’ll have to do is adjust your focus to retirement investing and keep it going for the long haul.
The newly found disposable funds will become your first retirement contribution. The first of many hopefully. If you’re starting with small monthly deposits, then consider upping them by 20 to 30% each year. If that’s too much, go for 5 or 10% — just do whatever works best for you. Don’t get fooled into thinking that you can’t start saving for retirement if you don’t have much money. It’s simply not true. Instead, do the best with what you have and work on improving from there.
Think your living expenses are already as trim as possible? Then move onto step three.
Step Three: Consider new opportunities to earn
While cutting spending can help you find a little extra money to put toward retirement, there’s only so much room in most budgets. Once you’ve cut what’s reasonable from your expenses, it’s time to focus on earning more money. How? Start with your day job. Ask for a raise at work, or apply for a better-paying job (or one with better benefits, like a pension plan). At 40 you’re in your prime working years and should be an expert in your field. It’s time to leverage those years of experience.
Next, look outside of your 9-to-5. Rent out a room, if you still have space in your house, or start a side business. Can you turn your hobby into a cash generator? Consider working a part-time job in a field that you’ve always wanted to explore. This might mean teaching on a part-time basis, offering consulting services for small-business owners in your field of expertise or even taking a part-time job at your local grocery store. Now is not the time for pride but for saving. Switch to a debit/credit card that offers cash back on your purchases. Route any additional earnings straight to your retirement plan. Total the amount of “extra” money you’ll have each month. Remember, every cent helps bolster your retirement savings.
The other single biggest thing you can do to improve your retirement outlook is work a few extra years. For one thing, doing so will get you a higher retirement maturity benefit. Staying on the job longer gives you the opportunity to save more and affords whatever money you do sock away more time to earn investment gains and grow before you begin tapping it. Every extra year you spend in the workforce is also one less year your nest egg should support you, which, all else being equal, lowers the chances of your money running out.
Is there an opportunity to continue in your field after retirement, such as consulting at your former full-time employer? Not only does the extra income boost weak retirement income, but the social connections and sense of purpose can help retirees stay connected to their communities.
Planning for retirement isn’t simple, especially if you’ve waited until your forties. Too many people have no concrete plans for their retirement years. When asked what they want to do after leaving the working world, they might say they want to travel. But is that realistic? You can’t travel every day, and travel is “expensive”. Writing a detailed plan for how you will spend your time after retirement can help you determine just how far behind you really are in your savings. If you plan to spend time volunteering, visiting with your grandkids and learning a new language or skill, you might not need to save as much money. But if you want a lavish retirement with cruises and international flights, then you better be ready to save much more of your income until then. But the sooner you start, the better off you’ll be.
Regardless of your goals, it’s key to not let a late start discourage you from beginning to save — no matter what your age. There is always hope. There is a retirement plan for everybody. If you are just starting to save at age 40, you’ll probably have to save with more gusto than someone who started earlier. You must be more serious about putting aside money. But you can develop a plan to make your retirement work. Speak to me for assistance on where and how to invest your money to ensure you get the most bang for your buck.