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.