In trying to get to the root cause of the retirement conundrum – that the majority of South Africans are not in a position to maintain their standard of living in retirement – there is a good chance that one might get caught in the crossfire.
The financial services firms charge excessive fees, investors argue. My broker gave me the wrong advice, others say. And this is often true.
You saved too little and cashed out your benefits when you changed jobs, investment groups hit back. This is also frequently accurate.
And then there is an economic and policy landscape that hasn’t been that helpful in creating an environment conducive to job creation and better savings behaviour.
But there have also been structural changes to the industry, such as the move from defined benefit to defined contribution funds, that have had a profound impact on individual savers.
Below are a few factors that warrant some consideration.
1. Retirement is not an “abnormal” event
Although the source of income changes from “remuneration” to “investments” and some expenses may fall away, retirement is not an “abnormal” event.
An industry expert argues that if people have saved enough money by retirement (90 minus current age x annual income needed), and invest it in a balanced fund with an inflation-plus-4% target, they will most likely be okay. Taking additional risk or investing in strange structures in the hope of getting better returns is irresponsible.
If you haven’t saved enough:
- Don’t retire
- Reassess your living standard and financial discipline
- Accept that insufficient savings cannot be rectified by risky investments
- Know that few people are successful in starting a new business with borrowed money at retirement.
2. Unfortunately, some people are compelled to retire before the “official retirement age”
Although there has been a growing group of voices advocating that individuals should continue working after age 65, South African companies are under pressure to employ younger people due to significant youth unemployment. In struggling industries, it is also those closer to “retirement age” who are most at risk of being retrenched as a result of the “cost saving” objective.
Yet, the last five years before retirement is also when most people have the largest pot of money and where additional contributions and compounding will make the biggest difference.
Pankie Kellerman, CEO of Gryphon Financial Services, says investors shouldn’t underestimate the capital and savings effect of the last five years – particularly amid increases in longevity.
Contributing to a retirement fund for another five years will not only supplement the savings pot that can be used to draw an income from later on, but will also reduce the period in retirement during which capital will be drawn.
Investors should consider delaying retirement for as long as possible. Even if your employer forces you to retire, it could make a significant difference if you delay retirement from the pension fund for a few years (if you can afford it).
3. The impact of inflation is underestimated
Although contributions of around 15% to retirement funds will tend to be adjusted in line with the official inflation rate over time as salaries increase, individuals often find that their individual inflation rate in retirement is much higher than the official rate, due to medical costs and administered prices (such as the cost of electricity).
Kellerman says inflation is generally not a significant problem during the first 15 years of retirement, but becomes a meaningful problem during the last 15 years when retirees often require costly heart, cancer or other medical procedures.
“Some of these procedures can be more expensive than your best remaining other asset – your house.”
4. The value of the family home is included in retirement income calculations
Although the value of the family home is often included in retirement income calculations (at least in the back of people’s minds), many people cling to their house and don’t move to a cheaper place once they retire, Kellerman says.
The difference in maintenance and operational cost, and the additional capital made available by scaling down, can make a significant difference in retirement, particularly if the “excess funds” are left to grow for another few years, without an income being drawn from it.
5. Children’s lifestyle should be determined by their earning potential, not their “inheritance”
While parents often want to help their children, they should not put their own retirement planning at risk in doing so. Children can still earn an income and should adjust their lifestyle in line with their finances.
Parents often draw too little income in retirement in the hope of leaving a legacy.
6. Inappropriate investment advice, excessive fees and underperformance
Since retirees may not be in a position to supplement their income once they retire, there is often a fear that money will be lost in the stock market, which may lead to conservative investment choices.
Kellerman says inappropriate advice may be the final blow for retirees. Inflation will continue to eat away at people’s disposable income – even in retirement – and investors would be well-advised to include growth assets that could outperform inflation in the long run in their portfolios.
Despite pressure on fees, there is still often a gap between the value investors receive and the fees they pay. What muddies the water is that investors may not be aware of all the fees, due to a lack of disclosure.