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Am I on track to achieve my retirement income goal?

If not, what sort of shortfall am I facing and how much extra would I need to put away each month?

I currently have a financial advisor but I am looking for some additional information, a sort of confirmation.

My question is: I have 23 years left until retirement, and unfortunately due to a ridiculously poor-performing work provident fund in the past and not having been able to afford much more to put away in a retirement annuity (RA), although I do have a small RA, I am currently sitting with retirement savings of only R1 million.

I have subsequently changed jobs, the provident fund is doing much better, and I put my previous provident find into a preservation fund, currently valued and around R870 000. The other R130 000 is in a Liberty RA, performing very poorly due to Covid and I believe it is linked to property.

I am currently putting R1 300 a month into my RA and R8 000 into my work provident fund.

By my calculations, when I retire, R30 000 a month should suffice for my and my wife’s needs; house, cars and all debt would be paid up by then, and children would be in their 30s. My wife also has a provident fund and RA, however, that would be added bonus as the R30 000 a month would sustain both of us, and we figured a sort of safeguard that should we fall short of the R30 000 a month from my retirement, hers would make up the difference. She is putting away roughly R2 200 a month into her RA and provident fund.

Would you be able to assist in giving me advice on if what I am doing would allow me to reach my goal of R30 000 a month from my savings? Or if it is not, what sort of shortfall am I facing and how much extra would I need to put away each month? What could I do to increase my savings total without increasing the monthly premiums?

Let me start by saying well done for starting to think about this question now. So many put this off because it is ‘just too daunting!’. You still have 23 years to retirement, which may seem like a really long time, but the sooner you start thinking and planning your finances, the better. There are very few factors, if any, that can beat the impact of compounding of returns over time. Simply stated: the more time, the better the outcome.

I’ve had to make a few assumptions in answering your questions. Firstly, I’ve assumed that you will retire when you’re 65, which makes you about 42 years old now. I’ve also assumed that the contributions you’re making to your retirement savings will increase with inflation until you retire and that your costs in retirement also increase by inflation. Wherever I mention monthly costs or savings contributions, I’m referring to the value of money in ‘today’s terms’.

Whether or not you will have enough for your retirement years depends on a number of factors.

Some of these factors you have little or no control over, and some you have direct control over.

The main factors that are important are the amount you save every month pre-retirement, the number of years you save for, and how much the investment grows by.

After you retire, the outcome depends again on how much the investment grows by but also by the initial amount you need to provide for your lifestyle, how that increases over time and also how long you need to continue receiving that income for (in other words, your life expectancy). Unfortunately, the last factor is a big unknown, which makes planning challenging.

You are no doubt aware that life expectancy has increased quite rapidly in recent years. You only need to have a look at the number of different 100th birthday cards you can choose from now, compared with 10 years ago. We like to plan for our clients to be able to sustain their chosen lifestyle until they are at least 95, and preferably until they are 100. Not everyone will live this long, but if you’re unwell, your costs are likely to escalate more quickly, as you draw down more heavily on your investments to cover medical and care-related costs; ie. you will anyway probably need the additional capital.

I’ve also assumed your investments grow by inflation plus 5% a year before retirement and inflation plus 4% a year after retirement. On this basis, your capital should last until you are in your mid-70s.

What can you do to improve the outcome?

Firstly, you could decide that you will reduce your costs in retirement, often easier said than done! I’ve calculated that you would have enough capital saved to last until your early 90s if you can reduce your costs to about R21 000 a month in retirement.

Alternatively, you could increase the amount you’re saving between now and retirement. I’ve calculated that you should aim to save another R6 500 a month to reach your target income in retirement and to still have a good chance that your investments last until you are in your mid to late 90s.

A Certified Financial Planner will be able to guide you on the best investment vehicle for your circumstances – retirement funds are a good place to start because of the tax benefits, but building assets outside of retirement funds gives you more liquidity later on and there are fewer restrictions on how much you can invest in shares, for example.

Apart from saving more every month or saving for a longer period of time, the final amount you’ve saved up will depend on how the underlying investment grows. So be sure to look into how much of your underlying investments are invested in growth assets like shares, versus more stable ‘low risk’ assets like cash and bonds.

Generally speaking, at your age, you should be looking to invest more in growth assets, bearing in mind that the investment is more likely to go up and down in the short term, as the value of the share market changes. Again, a Certified Financial Planner can guide you on the most appropriate portfolio for your circumstances.

Do you have any questions you would like answered by registered financial planners?

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So other MW reader, you are 42 like me and have just over a million already like me and you are putting away more than me. I think you will probably slightly exceed your target amount if you retire at 65.

What I would do though is move that expensive Liberty RA (if it is a unit trust RA or the penalty amount is low if a life RA) and it’s contributions into a lower cost one in a balanced fund with a managed or index provider (like Coro, 10X or Sygnia). You don’t say who the preservation fund is with, if it is also with a life insurer I would move it into one of those 3 providers too.

There are two important considerations missing in this analysis:

The R8000 to your company provident fund includes the provision of death and disability benefits. You will not be saving this full amount and that probably contributes to your perception that these vehicles underperform, despite having a far lower cost basis than RA products.

Your advisor puts you in an RA because he gets commission. He is also putting you in a living annuity till 95 because he will get annual commission again. Planning to buy a life annuity at 65 rather than a living annuity will boost your projected income by at least 20%.

The previous employer fund (now in a preservation fund) did badly, he is happy with the current ones performance.

While some employers might indeed lump it all together and it might thus performance would seem low if looking at contributions amount on payslip vs return, it is also possible for a employer fund to perform poorly (mine did -3.3 in 2018), all companies cannot choose the greatest fund provider, just like all people can’t.

My employer uses different providers for retirement fund and group risk cover, so all nicely separated on payslip at least.

“Planning to buy a life annuity at 65 rather than a living annuity will boost your projected income by at least 20%.”

This is quite simply not true. There are too many variables for both a guaranteed annuity and a living annuity to make such a balnket statement.

You do more damage than good by making categoric statements like this.

I am sure there are some really good planners out there with the CFP qualification. I am aware of some very poor ones too. Most of these respondents hold up the designation as a holy grail…. it is at best a decent foundation. Even a CFP needs experience, ethics and the intention to do good in order to help a client.

Prudential has a really good retirement calculator: I hope MW allows me to paste the link:

https://www.prudential.co.za/personal-investor/our-funds/tools/retirement-calculator/

A few other things I think you should consider:

1. Income tax post-retirement. In real terms you need R30K per month. Is this before or after tax. If after tax, then factor in what you need to gross in order to net R30K per month (i.e. after tax).

2. Due to point 1, I would consider a tax-free savings account. Whilst it doesn’t have tax benefits pre-retirement like an RA, it is not taxable when you draw down from it

3. Consider what the charges are from your fin. advisor, RA, etc. 1% makes a big difference of 23 years. I would consider Satrix EFTs or RAs. They offer great index trackers and I haven’t found anyone else in SA that competes with them on cost. And they also offer global trackers like MSCI World Index and S&P 500. ZAR based, yes, but at least you can also get some Rand hedging exposure.

All the best with your retirement goals

How a retired couple think they can live on 30k per month in todays money, even if they have no debt, beats me . Medical costs alone will be 8-10k and groceries will come to a similar amount. What about all the other expenses!

Your solution is?

Die young….. Sounds funny.. But for a vast chunk of supposed Middle class people this is pretty much the only vaible alternative. The middle and the bottom half of the “middle class” here and around the world has been hollowed out. Life is not gonna be the same as what it was for their parents.

As previously mentioned, it is great to think about your retirement savings now rather than later. You are in a decent position as a lot of people are not in this position in their 40s as they did not have the foresight to preserve their previous company funds, so well done for preserving the funds.

Getting to the bottom line of your matter, again we need to use assumptions here and we would say you are currently 42 and retirement will happen at 65. CPI in South Africa is not a real factor of what it should be so I have set inflation at 6.5% for you as well as getting a 10% return on your investment each year. I am not sure on how your salary and current Liberty retirement increases will be and will show a 6% and 10% increase later.

Your current Liberty Retirement should have come back from Covid as markets came back after Covid exceptionally well and one of the quickest market recoveries in history. It seems you do not have a current advisor at Liberty as you are not sure why the fund has done poorly and your belief is the property portfolio. Your Advisor is legislated to review your policies as well as portfolios at least once a year. The property portfolio was once a flagship fund in SA however it has been on the decline for some years now, it has had an increase over the past year but still nowhere near what it was previously achieving. As an advisor who does work with Liberty products the portfolio/s of choice may not be the only factor and it may be you are in an older retirement product with high fees and costs. Liberty does have newer lower costed retirement products that could save you on the platform costs, each percent saved on costs means this will go into the growth of your fund. The newer “Libery Retiremnt Annuity” also comes the lowest costed guarantee (only 0.2% pa) as well as a guaranteed income option at retirement that let’s you know exactly what your income will be at retirement.

The preserver too you should look at the effective annual costs on the platform fees and commissions as this may also not be in the best costed platform for your growth going forward.

I have looked at your current situation and you would like to achieve R30 000pm again assuming this is a nett after tax income therefore you will need a gross income of R37 394. I have assumed your retirement will last you for 20 years, your age 85. You have mentioned the funds are for you and your wife and female life expectancy is higher than males, having said this making use of the correct retirement vehicle could mitigate this situation. You have the option of a living annuity subject to market returns as well as your own choice of drawdown between 2.5% and 17.5%pa. Alternatively there is the life annuity that will guarantee your income each year for life with no market risk, this can be done as a joint life annuity for you and your wife, this will mitigate the life expectancy factor.

Your current R30 000 in today’s money will equate to R124 094pm in the future (age 65) you are currently on track for R21 048 monthly (R87 065pm future value). You would need to save an additional R10 755pm increasing by 6% each year or R7 427 pm increasing at 10%. You can decrease these amounts by the R2 200 for your wife’s contributions to her retirement funding.

If you are contributing R8000pm into your work fund it would seem you are on a good salary and a higher tax bracket so contributing more to your personal retirement annuity would mean you get a greater return from SARS on an annual basis as contributions to a retirement fund reduces your remuneration. If your salary was between R600k-R800k you could potentially get back between 39-41% back for your retirement contributions. The R1300pm is R15 600pa and let’s use an average of 40% as your tax rate, you could potentially get back R6 240 on you annual tax returns. This R6 240 you can place back into the retirement fund and get back your 40% the following year (R2496) or place into a tax free savings account to build up liquidity for retirement.

These are rough guesstimates and would not constitute as advice as I would need to conduct a proper financial needs analysis in order to advise correctly.

If you do need any advice or would like to look at your retirement and portfolio options please do not hesitate to get in touch with me glen.bebbington@liblink.co.za

Many of the people who have posted frequently give age of retirement of 65 – this is a crazy thought process. Many companies when under stress will let the older persons go on retirement ahead of age 65. If you are retrenched your package is hardly likely to give you the flexibility to meet steep RA/LA commitments without sacrificing elsewhere. Planning for your retirement should actually start the day you start working – there is no manoeuvrability once you are 3 – 5 years from retirement

End of comments.

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