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Does the way we think about retirement still make sense?

A lot has changed.

The notion that people are only successful if they enjoy complete financial independence in retirement and can support themselves may need a rethink.

The traditional concept of retirement – where people save for several decades, retire at 60 and die a few years later – is being turned on its head by increases in longevity and the growing medical needs associated with it. Many people do not have enough money to maintain their standard of living in retirement and although they may still like to work, they may not have the opportunity to do so. 

A recent Alexander Forbes survey found that the average retirement fund member would only be able to replace 28.8% of their last salary when they retire. In other words, for every R10 000 they earned before retirement, they would get R2 880 as a pension.

Sunél Veldtman, CEO of Foundation Family Wealth, says the western way of thinking suggests that people only have financial independence if they can look after themselves.

“The fact is that in the future, that picture of retirement also will change. Very few people will be able to look after themselves from what I’ve seen out there,” she told attendees at Moneyweb and Liberty’s Retire Well Masterclass.

Veldtman says if South Africans consider financial freedom as being completely independent, most people will fail and this notion will have to be challenged. Even if a couple is financially independent in retirement, there is a good chance that their children or other family members might not be.

“We need to think about that: what are the creative ways that we can still think of ourselves as successful and still enjoy our lives and still have that meaningful purposeful life … but actually co-depend on each other.”

Apart from pressure to support an extended family, South Africans also place a premium on education. People are sending their children to private schools or extra lessons which may put a significant financial burden on families. Many people in their 50s and 60s are supporting children as well as parents – the so-called sandwich generation.

“I’m dealing with this every single day in my office. Real problems that clients have is: ‘My children want to start a business.’ ‘My wife’s sister needs an urgent back operation. She is not on medical aid.’ Those are the real questions that people have that really impact their retirement.”

Gerald Mwandiambira, acting CEO of the South African Savings Institute, says while Africans have always embraced the concept of common wealth, the current retirement system essentially forces individuals to save for themselves, even despite family pressure and the accompanying ‘black tax’.

“Why can we not design a retirement product which creates an annuity flow for a group of people, because that is how it has always been. Why must retirement focus on the individual? Why can we not have a family retirement policy?”

Confronting challenges

Francois le Roux, financial planner at Private Wealth Management, recalls a visit from professor Sarah Harper, a longevity expert from Oxford University, who warned that the current generation of British people would not enjoy the same standard of living as their parents, even though it is a first-world country.

Although the British pension system differs from that of South Africa’s, the country increased its retirement age a few years ago.

“The fact is that the tendency to retire earlier, the tendency to live longer, is a huge challenge,” he says.

However, while the concept of retirement is changing, the fundamentals remain important, Le Roux says. The amount people save, how long they save and their investment returns remain the three most important factors to consider, but only the amount saved (and preserving it) is really within people’s control.

“Exactly how long you would be able to sustain your contributions is an uncertain fact. You might get sick. You might get laid off. You might be forced into earlier retirement. There might be ill health at play … So while you have the money I think it is vitally important – even if you start small – to start earlier sooner than later. It is a lifelong process.”

Brought to you by Liberty.

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The concept of retiring may need adjustment in order to make it practical; equally the concept of yearly huge increases with “inflation” or “inflation+” by the insurance companies, toll roads, medical industry, service providers, municipal taxes etc. will need adjustment and a sense of realism. Otherwise pensioners (and even non-pensioners) will become a marginalized group and be pushed into poverty by design. Many of these “costs” are built on unsustainable business models and expect citizens to continuously have wonderful and magic increases in their salaries each year. That is a myth and will eventually lead to the inability of most pensioners to pay for these costs as their income growth and their expense growth are totally divergent. This self-serving covetous behaviour of service providers is deplorable. This behaviour is designed to create poverty, totally marginalize the poor and to exclude them from improving their living standards. Government and private industry are both guilty of these “adjustment for inflation” practices.

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