CIARAN RYAN: We are talking to John Anderson, head of group client solutions at Alexander Forbes. Good morning, John.
JOHN ANDERSON: Morning, Ciaran.
CIARAN RYAN: We are going to be talking about retirement, and how one can retire comfortably or retire well. Perhaps we can just spend a minute talking about that. What does it actually mean ‘to retire comfortably’? Does it mean enjoying the same standard of living that you had when you were working?
JOHN ANDERSON: It’s a good question, and we face it quite often when a lot of our clients ask what a good retirement would be. Often, if you look on Google, and you look up ‘a good retirement’ you see pictures of someone on a yacht, touring the world, doing various things, playing golf.
The reality is not that. It’s really about having an income and a sustainable income to maintain your standard of living. I think that’s quite personal to each individual, and it depends on how much you were earning before you retired, and how to maintain that after retirement. I think that’s the main thing. It’s a pool of income to maintain your standard of living. And if you have other goals, you can factor those in. But, as a standard, I think that’s what people are really looking for.
CIARAN RYAN: So, in your experience at Alexander Forbes, what are some of the main challenges that you’ve seen for people approaching retirement age?
JOHN ANDERSON: I think the main one is [not] having saved enough. I think that’s really a big lesson for a lot people. Many people seem to wish they had saved more and saved sooner. It doesn’t mean that there aren’t things that one could do, but if they were to do things, they probably would advise younger individuals to start saving more as soon as they can and for a longer period, as well as when they change jobs, to preserve those savings because, often when people leave [a company], they cash out their [pension/provident fund] money.
The other challenge that we see for people is that many of them have been very important in their work with their colleagues, doing functions, and it’s the transition into retirement that ensures that they have something to do after. We are seeing a lot more people getting involved in some form of work after that. Our advice is to start being proactive about their second career, or what they will be doing after. I think the days of a person stopping work completely are really over. Keeping your mind active is very important, getting involved in a different capacity. But you need to prepare for that well in advance of the day that you retire, so that you are not caught off-guard.
CIARAN RYAN: Again, if you look at Google, there is a lot of free advice there on how to save. Of course, the best advice you could probably give is to start saving early. But I’m going to ask that question – in your experience, what was the best advice you ever received on the subject of saving?
JOHN ANDERSON: For me the best advice was to start, even if it is with a small amount, with whatever you can. And every year that you get a promotion, salary increase, a progression, first have a look at how much you put away for yourself for the future before spending it all. The reality is that you need to be consistent with it every year. Do it day in and day out. It takes 40 years, really, to accumulate sufficient amounts of that income. That to me was the absolute best advice I got.
CIARAN RYAN: It’s quite an interesting exercise to sit there and use these Google calculators that you can get online, where you plug in a certain sum of money or a certain amount of savings per month, and you just see how that thing grows. You can do all these ‘what if’ exercises. If I increase my savings to R2 000 a month, what will it end up at over 30 years?
JOHN ANDERSON: The important thing there, though, is I think you just need to have a look at what the calculators are giving you. Some calculators give you a rand amount in 40 years’ time that looks like a huge amount of money, but the reality is that inflation eats away at your living standard over time. You really do need to look at an amount that is an income at retirement, and you need to compare that relative to today’s monetary terms.
If you are using a calculator like that, and as long as they have reasonable functions, work through them. I think those are good tools to use. But as a rule of thumb, our numbers are showing that you need to plan from as early an age as 25. Start aiming for about 15% to 20% of your salary. And if you are not able to, try and get there as soon as possible, consistently over a 35- to 40-year period, for a reasonable retirement.
CIARAN RYAN: Right. So, if somebody can’t put away 15% to 20 % of their monthly salary, what they can of course do is when they get a bonus or a 13th cheque, or a bonanza of some kind or another, put that into their savings and try to catch up that way.
JOHN ANDERSON: That’s right. We also advise a lot of employers. Employers that start up are not able to provide full benefits for all their staff. They start off with a minimum contribution – it can be as low as 5%. But at least start, and then every year gradually get up. Before you know it, you are at the 15%-plus. As you say, when you get the bonus or other benefits, you can use some for a holiday or something, but always put a portion towards the future, and use those opportunities as they come along.
CIARAN RYAN: I think it’s also a question of breaking habits, isn’t it? When a 13th cheque comes along, it’s usually around Christmas time, and there are some extra expenses there. So it really is a question of how you get people to break that habit of spending these unexpected amounts of money that come in.
JOHN ANDERSON: The most powerful thing is if you can commit to a savings amount, and then gradually increase it every year, to look to it up front. And then, if you do so automatically, that’s the most powerful way. Unfortunately it isn’t a habit. It’s just like you wanting to lose weight, for example. The only way to do it is have a healthy diet, but you need to stick to it every single day because it holds great rewards at the end of the day if you do stick to it.
CIARAN RYAN: Let me ask you this question. I’ve asked you what was the best financial advice you received, and the answer that you gave was to start saving early, which of course makes sense. But what was the worst advice that you have ever received or heard?
JOHN ANDERSON: The worst? I came across someone who said don’t worry about saving now. First pay off your bond, do this, do that and by the time you get to age 45 or 50 your debt will be paid off. At that stage you can then really save a lot more and catch up, and you can save a big portion of your salary.
Now, initially that sounds like good advice because, I agree, you need to pay off debt, you need to do various things. The problem with that advice is that as people we like to defer things anyway. Saving is, as you say, a habit. You need to get into it from as early an age as possible. By deferring it, you don’t get the benefit of compound interest, you don’t get the mindset of saving. So [despite] what initially appears to be oh, okay – absolutely do not defer. Even if you save a little bit because you want to pay off debt now, pay off debt, but also in the background start saving a little bit so that over time you can increase that. So the worst advice is to put it off ‘because you’ll make it up later’. That is probably the absolute worst, because you’ll never do that, as we’ve seen in practice.
CIARAN RYAN: That’s quite interesting advice. I haven’t heard that before. So, even if you have debt, continue to save, no matter how small, because you are going to develop the culture or habit of saving, and that will just grow.
JOHN ANDERSON: Exactly. By saving, what happens is you also start getting in touch with the market, look what’s happening around. It generates better behaviour and, because of that, you can then understand how important it is to reduce your debt further and save more. You become interested in the economy. It has a lot of other benefits to it, but you have to do so, even if it is a small amount, as soon as possible.
CIARAN RYAN: So tell me what the role of the financial planner is in all of this. Do you need a financial planner or a financial advisor to help you to plan your path towards retirement, and what should you expect in terms of advice and service from that financial planner?
JOHN ANDERSON: It you are playing soccer or rugby or any other sport, you need a good coach to keep you going. What are the latest techniques on how to do various things to improve over time. There are some people who maybe could do it themselves, but what we have seen in practice is that most people, and even very financially sophisticated people, do need a coach to help them, because a planner that’s independent can bring a bit of perspective to the discussion.
A very important role of the advisor is to keep you on track, keep you motivated, keep you in that habit. But more importantly, there is all the expertise that comes with it into what is the right amount to save, are you on track, what savings vehicles you need to use, how to invest appropriately towards the different goals that you have. So I think it’s absolutely critical.
But it is important that when you engage an advisor you make sure it is someone who is credible, who is knowledgeable, but also someone you will get along with and who can help you. You need to really shop around to see that there is a good fit.
Then you also need to make sure that the fee you are being charged is fair relative to the service you are getting. I would recommend go onto the FPI – the Financial Planning Institute – website and just have a look at people who are accredited for giving financial advice with a professional qualification. And make sure that the person is appropriately qualified for that. You can also check on the old Financial Services Board, which is called the FSCA now.
CIARAN RYAN: That stands for Financial Services Conduct Authority.
JOHN ANDERSON: They actually have a register where you can verify that advisors are appropriately qualified and registered to give that advice.
CIARAN RYAN: So basically you are looking for somebody who, first of all, is knowledgeable. But there must also be some chemistry, and you’ve got to feel that you get on with this person, and that the advice you are getting is sound.
JOHN ANDERSON: Yes. We have just over a million members in our pension fund, and we recently conducted our member-watch analysis. That has a list of the trends and saving behaviour and the ultimate outcomes. What we have found is that the minute you introduce an advisor, the amount of pensions that people are securing goes up, and the amount that people save goes up. So that just illustrates the benefit of having an advisor. There are people who can do it themselves, but they are probably few and far between. I think the overall statistics show there is a strong correlation between having a good advisor and having a good retirement.
International research shows that it’s the first time in Africa that we’ve been able demonstrate that.
CIARAN RYAN: It’s almost like working by yourself, or working with a group. When you have a boss looking over your shoulder you are more likely to work hard. And it’s the same if you have a financial advisor looking over your shoulder – you are going to save more. That would make sense.
JOHN ANDERSON: Yes.
CIARAN RYAN: Retirement industry products are, for a lot of people, quite complicated to understand because they’ve all got different tax implications and they all have different structures. You’ve got tax-free savings accounts now, you’ve got retirement annuities, you’ve got pension and provident funds. Would it be correct to say it’s better to develop a savings habit first, and then start worrying about which products to choose?
JOHN ANDERSON: Yes, I definitely should start to develop the savings habit first. The good news, though, is that the vast majority of working South Africans, most people actually, would have an arrangement already in place through the workplace – and it’s either a typically a pension or a provident fund. We don’t have to worry about whether it’s one or the other. The point is there is typically a retirement savings vehicle readily available, and I would say use that, because they’ve already done all the [necessary] things, making sure the fees are appropriate. That’s the easiest way to get into that product.
If your employer doesn’t have something like that, it’s not that complex. These days it’s very available with retirement annuities. You can easily look at the websites of various providers to easily help you with that, as well see an accredited advisor to help you between those options.
But my first port of call will always be looking at what your employer has, speaking to your human resources people. You should find in a majority of places there is something easily available there. Start there.
CIARAN RYAN: And of course for people who are self-employed, who may not have a pension or a provident fund, you’ve got retirement annuities – and there is a wide selection to choose from there. And you have tax-free savings accounts and various other products that you can save into.
JOHN ANDERSON: That’s right.
CIARAN RYAN: Final question: what advice would you give to people who have 15 or 20 years to go to retirement, and have no savings whatsoever? Is there hope? Is it too late?
JOHN ANDERSON: It’s never too late. The first thing you need to do is recognise that you need to start. Again, even if it is a small amount. And there are other levers that you can play. If you started to save late in life, the reality is you just need, over time, to catch up. So start now.
But there are other things you can do. It just means that you are going to have to retire maybe a little later that you would have planned. That’s not necessarily a bad thing, but you need to keep your mind active anyway, and you need to supplement your retirement income with some kind of work. You’ll just need to do that for a bit longer. The alternative is to reduce your living standards – that’s unfortunately not easily done. But start planning now, and see what you can do. There is a lot you can do over 20 years to improve the whole situation, but you need to start doing something about it today.
CIARAN RYAN: Alright. Thanks to John Anderson.
Brought to you by Liberty.