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Sweating pensions in the post-retirement phase

For those concerned about funding their retirement, splitting the years of retirement into distinct phases could make planning easier.

Last week Peter Nurcombe-Thorne wrote about Six retirement ‘rules of thumb’ that should be retired and Can I afford to retire early? This article considers the options of those who have already retired and have to find ways to eke out their savings. 

Only 6% of South Africans (about 3.4 million) are over the age of 65. On the other hand, in the United States 15% (46 million) are over the age of 65 and in the UK, 18% of the population (nearly 12 million) are over 65. Our political focus is quite rightly focussed on the needs of the youth.

In developed countries relentlessly aging populations have forced governments to change the political agenda away from an exclusive focus on youth to the needs, challenges, and aspirations of middle-aged and mature consumers.

Previous generations of retirees (who expected to live a mere 10 years after retiring) could safely convert their savings to cash and live off the interest when they retired. Today, the combination of higher inflation and a longer life span has ensured that for many, this strategy is inadequate. Increasingly there is a risk that savings will be depleted before death.

At Rosebank Wealth Group about 40% of our clients are over the age of 65 and helping them meet their retirement needs is a central challenge of our advisory business. We are also mindful that the combination of persistently low returns, below inflation salary increases and a changing labour market means that our younger clients will need to save more to enjoy their retirement.

The picture is far from rosy. South African financial advisors estimate that a mere 6% of South Africans are able to retire in comfort. Data from the US Census Bureau shows that the average retirement age in the United States is about age 63 and that the average length of retirement is 18 years. However, almost a quarter of Americans believe they won’t be able to retire until age 70 or older. Worse yet, 5% are convinced they’ll never be able to retire at all.

Unlike some retirees in other countries, our clients know that they are on their own in their senior years. No government is going to rescue them. Perhaps because of this, they have shown that they are resilient, adaptable and hopeful when faced with financial and other challenges. They are quick to grasp the necessity of cutting back where they must, supplementing retirement funds through extra work and adopting healthy lifestyles to cut down on medical bills.

Like other ‘boomers’ (those born between 1945 and 1959) around the world, they are changing the rules of retirement to meet their current needs.

There is a lot we can learn from the offshore retirement studies. For example, a report published by Merrill Lynch and Age Wave Leisure in Retirement: Beyond the Bucket List, showed that retirement is not a homogenous period; there are distinct phases which require different levels of financing.

For those concerned about funding their retirement, splitting the (possibly 25 years) of retirement into distinct phases could make planning easier. Taking on retirement in bite-sized chunks could ensure that there are still savings for the time they are really needed to pay for frail care.

First phase (about 65 to 75): Technology has ensured that for many, the line between work and retirement has blurred. The Merrill Lynch study says that while nearly 55% of retirees began their retirement earlier than expected, nearly 50% of retirees currently work, have worked, or plan to work in retirement.

During the first phase of retirement, if you enjoy good health, you might choose to postpone retirement, retrain, try another job or even start a business. American statistics show that the fastest growing segment of the total American workforce is those aged 55 and older. Statistics show that of those who work, 27% work because the money is ‘necessary to help pay the bills’, 19% work because the money ‘helps me grow or maintain my nest egg’, 17% work because the money ‘is a nice reward for working but is not necessary’ and 37% work because the money ‘will provide fun money used for discretionary purposes’. In South Africa, working longer has many advantages, not least of which is that a regular salary ensures that medical scheme contributions are more affordable.

The first phase of retirement offers wonderful opportunities for personal growth, active travel, new hobbies and volunteering.

Second phase (about 70 to 80): This phase, which is usually associated with reasonable but declining health could be described as a ‘wind down period’. While some seniors may continue to lead active family/sporting/volunteer/hobby-filled lives, others will be compelled to slow down. Figures from the US show that in the period some (9%) still work, often in different and more enjoyable ways than their core careers.

Third phase (about 80 and older): For many seniors, this is the time that long-term savings will really be necessary. There are no reliable statistics which show the inflation rate of frail care provision, but as it is personnel intensive, it is likely to be similar to medical and education inflation, both of which tend to be at least 2% higher than CPI.

As of 2017, the cost of specialist frail care facilities in Johannesburg ranges from R15 000 to R23 000 per month depending on the level of care required and whether or not you want a private room.

So what should you do?

If you are about to retire:

  • Adopt a ‘tactical asset allocation’ investment strategy to stay one step ahead of inflation while avoiding risk. With the help of your financial advisor, design a portfolio of investments that combines many different types of investments, including equities, bonds, alternative investments and in some cases, guaranteed annuities. We will cover more of this in the next article.

If you have already retired:

  • With the help of your advisor, rework your savings to withstand inflation and periods of low performance.
  • If you can, supplement your pension with extra income.
  • Stretch your money. Simplify your life and reduce your standard of living.
  • Try and maintain a draw of 4% or less from your living annuity and restrict your income escalations to inflation or less. This should result in your money outliving you. Look out for an article on how to select a sustainable withdrawal rate coming in the next month or so.  

ADVISOR PROFILE

Peter Nurcombe-Thorne

Rosebank Wealth Group (Pty) Ltd

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