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6 retirement pitfalls to watch out for

Navigating a landscape fraught with landmines.

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. 

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Hooray, a most pragmatic approach to the testy issue of retirement.

I am 72 years old and living on a mostly self funded pension. I can honestly say that I prepared for my retirement, paid off my house as soon as possible, never cashed pension benefits, kept my old car, never indulged in expensive clothes, jewelry or restaurants and retired at 66. I did travel overseas, but only because I won an amount of money which I invested specifically for this purpose. I did okay until this year, preserving my capital, but this year has been a catastrophe. I have seen my unit trust investments being depleted and really not recovering and have been torn between cashing in the lot and investing in fixed deposits. I decided to sell my house and buy a very much smaller home with a view to reducing my living expenses. Now this is the catch, I used a small commission agency, Homebid, (excellent choice) and this was a real saving. However, I have found myself in situations where an agent from another agency tried, repeat tried to con me into paying him an extra R50 000.00 commission and where my current agent failed to disclose all the facts regarding the new property. Still the other factors are amazing. The conveyancing lawyer has quoted me R40000.00 to do his job and that includes R20 000.00 lawyer’s fees alone. The purchase price is R1290 000.00. I am fighting for a discount. On my old house I have to pay R1300.00 for a clearance levy certificate (excessive for someone who in thirteen years has never defaulted) plus four months municipal charges worked out on an inflated amount. There are still more amounts to come for the new property e.g. four months electricity and four months levy. Now if you take moving charges etc. is it really worthwhile selling your old property? I dispute this. Should have thought this through more carefully. By the way, watch out for many estate agents. They are not above being unethical and downright dishonest. I am still faced with reporting to the estate agents board these sharks.

I would suggest buying properties to let for income because with that, you are able to benefit from rental increases and the income stream is quite steady.

The advisor-rogue types are very vociferous against this claiming that there are tons of non-paying tenants out there. In 10 years, I have yet to have a tenant skip a month’s payment.

The biggest problem of course is the ongoing land discussion that is the ANC and EFF election narrative.

I wouldn’t buy property right now, but perhaps after the elections when the ANC reverts back to be ornamental.

Absolutely agree on the ‘scaling down’ issue. One must calculate all costs involved in moving: lawyers, conveyancing and actual removal.

Also understand that some people think that living in a cluster is cheaper than a house – the levies can often exceed that of a house. We have often calculated down scaling for my parents and the cost of moving to a smaller place is more expensive than their current house even after factoring maintenance costs and other expenses.

Always scrutinize information from ‘experts’

Agree. Smaller and secure complex housing, is hardly cheaper than free-standing house. One issue of large house when one is perhaps not physically strong anymore, is the large garden upkeep, etc.

One option worth exploring (IF the property is laid out like that) is to move into a garden flat, and rent main house out. And you’re close to your tenant, to keep your finger on the situation.

…and I shouldn’t be saying this: to avoid paying tax on rental income (since one owes a single property on the Deeds register, and not multiple properties that could raise suspicion form SARS) get the tenant to pay you cash (or e-Wallet) instead…give the tenant some cash discount as incentive…but not more what you may pay in tax (depending your marginal bracket).

When will people realise that with the average life expectancy of 80, they should only be retiring north of 70 unless they want their money to run out!

Agree. Due to improving medical science, people on average live longer. The generation that will constantly live past 100 age, has already been born.

Retire at 75…live to 90’s.

Problem with “retirement” is that no-one survives it alive. Keep on doing one’s own business interests, if possible.

This would apply to people who fail to plan for retire right from Day 1 of your work life. If you set aside 22.5% of your gross income todays a pension (and manage the fees) you can still retire at 55 – 60 years of age. Also it makes sense to plan to reach 90 years of age but check your families history of longevity for confirmation. The true killer of most pensioner pensions is the rampant escalation in medical aid fees and doctor/dentist costs

After perusing this subject for very long now in preparation of my retirement at age 55 in a few months I have come to the conclusion that people simply do not save enough and then wants to draw a too high income from investments, too high I regard as 5% or more. I have saved 32% of my pensionable salary for 25 years now and this resulted in having approximately 13 times my annual salary in provident fund savings. I have no debt and going to invest all the money in a balanced fund compromising between 35% and 45% equities and the rest of the fund in income bearing assets and draw an initial income of not more than 3%. I am of the opinion that my money will actually increase based on a 9% growth rate per annum.??

I know of retired people who take 5% of there investment per year as this is what they were told by their financial advisers. Their financial advisers also told them to drop their medical aid schemes to a lower level to save money, basically only a hospital plan. Not advisable in old age.

These same financial advisers (should I say chain of brokers, asset managers, and the others who seem to require a piece of the action) take 3% of the investment per year as fees. That is 60% of what the retired person gets!!!

It really doesn’t seem fair for retired people to be told to ‘change your lifestyle’ and ‘save more’ and what not when those are the types of fees charged.

Basically if you have R 5 000 000 invested. Your get R 250 000 for the year and the financial services firms get R 150 000. That is a big difference for the retired people in question.

Paull I’m not sure if I’m correct but are you saying you’re going to be able to live off 39% of your final salary.If so then you’re well on your way.

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