Retirement planning: It’s about the process

You have to be flexible.
Craig Gradidge

Retiring well is not a problem that has a single solution. Speaking at the Liberty Retire Well Masterclass in Johannesburg last week, Craig Gradidge of Gradidge-Mahura Investments pointed out that planning for retirement is by its nature a highly complex task.

“Your retirement is something that happens at some point in the future and then lasts for two to three decades,” Gradidge said. “And because it happens over a very long period of time, there is a great deal of uncertainty. You take decisions now, and can’t know for sure what the consequences of those will be. And, similarly, when certain things happen in the future, you can’t always trace them back to the original decision that you took now.”

This is because of the number of variables involved in making financial planning decisions.

“Most people have the idea that they want to retire comfortably, earn as much as they did in their working days, go on overseas holidays every second year, spoil their grandchildren, and leave a legacy at the end of it all,” said Laurie Wiid of NFB. “But how do you do all that? There are so many variables. You have to worry about the impacts of tax, medical aid costs, the markets, inflation, and these things change over time.”

Wiid pointed out that 20 years ago there was no capital gains tax or dividends withholding tax in South Africa. Retirement planning decisions made back then could therefore not have taken these into account.

Similarly, the interest rate environment in the country has changed significantly in the last couple of decades. In the late 1990s, interest rates peaked at over 20%. Today they are at 7%.

This has a big impact on expected returns, and the guaranteed income you might be able to secure from an annuity. This also has to be considered in light of inflation.

“You have to make assumptions about the future, but even a 1% difference in what you have planned for can make a big difference,” said Wiid. “If you assume that inflation will be 6% but it goes to 7%, and you assume that returns will be 10% but they turn out to be 9% – that has a huge impact on the real growth of your money.”

 

Dealing with uncertainty

Given that retirement planning has to deal with all of these variables and the uncertainty that they bring, Gradidge said that the key to doing it successfully is to understand that it is a long term process.

“The solution for retirement planning is not a single product,” he said. “We do have products that we can use in our arsenal, but the annual review process is a whole lore more important.”

In other words, any retirement plan must be reviewed as circumstances change. Investors also need to accept that they may have to reconsider some of the variables that they have control over, such as the age at which they retire, how much they intend withdrawing from their savings in retirement, and how much they are contributing now.

He provided the example of a client for whom he first drew up a retirement plan three years ago. After a thorough assessment, they established that he had the following requirements for his retirement income:

 

Current age

48

Retirement age

60

Years to retirement

12

Months to retirement

144

Retirement income required (today’s money)

R 45 000

Estimated tax rate

29%

Retirement income required (pre-tax)

R 63 291

Expected average inflation rate

6%

Required monthly income at retirement

R 127 354

 

Source: Gradidge-Mahura Investments

 

Having worked out what the client needed in today’s money, it was possible to work out how much that would need to be in actual terms at retirement date, assuming a certain rate of inflation.

The question then becomes how much money would the client actually need in order to secure this income:

Required income

R 127 354

Income growth in retirement

6%

Expected annual portfolio return in retirement

8%

Life expectancy at retirement

30

Months in retirement

360

Capital needed at retirement

R 34 988 953

PV of capital needed at retirement

R 10 001 271

Initial yield

4.37%

 

Source: Gradidge-Mahura Investments

 

Having made these calculations, it was possible to determine what the client needed to invest each month to get on track to reach his goals.

However, what has since transpired is two years in which the JSE has delivered very muted returns. The expected annual portfolio growth has therefore not been realised, which means that there is now a shortfall in where the client should be in his progress.

This is where the financial planner plays a critical role in reviewing a client’s retirement plan and discussing what this period of under-performance means in the long run.

“If I had originally told this client that I have his solution for retirement, he could tell me now that my solution is broken,” Gradidge explained. “But when we drew up his plan, I told him about the variables so that when he sees this he understands. We’ve assumed a certain return and he hasn’t got that, but it’s not the end of the world. The solution is not broken because the process is still working.”

This is the value of proper financial advice and a financial planner who can take a holistic view of your circumstances. In a highly uncertain and complex world, having this guidance can be invaluable.

“When you have such complexity and uncertainty, the process and the mindset is what matters,” said Gradidge. “You must have a flexible and adaptive approach.”

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COMMENTS   1

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this is a case study – no resemblance to real life!!!!

End of comments.

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