The lack of proper planning, longevity, health, annuity choice and historical behaviour are some of the threats that directly affect a financially secure retirement. Continuing from part 1 of the threats to a financially secure retirement, here are five more:
With many corporates suffering from top-heavy human capital structure, the older, better-paid employees are being replaced by younger, lower-paid people with offers of early retirement or retrenchment packages. Unfortunately, many people go on early retirement, not realising the impact it will have on their retirement savings. These consequences include:
- The loss of additional years of contributing to a tax-incentivised retirement fund by yourself (and your employer if you are a member of an employer-sponsored fund).
- The loss of investment returns on your accumulated retirement savings for the years of early retirement.
- Additional years being added to your retirement years, which means your money could run out sooner.
- The younger you are, the more a guaranteed pension will cost you. With a guaranteed pension you will be able to buy a “cheaper annuity” when you are older as you are expected to die sooner.
It is a fact of life that inflation will affect you in retirement. It simply means that the R1 you have today will not be worth R1 in ten years’ time. A typical inflation rate of 7.2% means that the purchasing power of your rand will halve every 10 years. For example, R10 000 a month now, with an inflation rate of 6%, will reduce to R5 583 in 10 years’ time, R3 118 in 20 years and a mere R1 741 in 30 years. To curb this massive threat, you will have to follow an investment policy in retirement that will ensure that the buying power of your pension will not be eroded by inflation year after year and that you receive investment returns that are above the inflation rate.
Poor investment decisions
Retirees get increasingly complex investment products, together with poor and unqualified advice, which is compounded by investor greed and fear. The result is bad investment decisions are made that undermine your accumulated retirement capital. Some of the poor investment decisions include unwise spending decisions, such as repeatedly changing homes without calculating the extra costs, interest and taxes, or buying new cars too often. It simply means less money available for retirement income. People also tend to fall prey to promises of excessive “guaranteed” returns and using their early retirement or retrenchment packages to start new businesses, often without the necessary expertise. Sometimes these businesses are successful, but it is important to note that South African statistics show that 60% of new businesses fail within the first 24 months.
High costs and adverse product structures
South Africa is renowned for having some of the most expensive retirement products in the world, which include complex, non-transparent and multi-levelled annuity investment products. With this comes costs, something that will quickly erode your hard-earned savings. Always check the impact of costs to ensure you get the best returns.
Kids out of the house not guaranteed
Finally, the boomerang or sandwich generation means that people getting ready to retire, while their children are already settled, is no longer a guarantee. Often young people are unable to find jobs, or well-paying jobs, resulting in retirees financing their children and grandchildren for far longer than expected. This makes sustaining their desired lifestyle virtually impossible with many finding themselves sandwiched between both their parents and their children, having to provide for both.
Considering the ten major threats to a financially secure retirement, it is important to acquire sound advice from a reputable, skilful and knowledgeable financial planner with whom you have built a long-term relationship or to start looking for one sooner than later.