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By Marise Smit*
Financial advisors the world over have been preaching the gospel of eternal wealth creation to its followers for years. History has proved, the proverbial message that “all things come to those who wait” many times over, but despite the numbers adding up the South African people are not buying into it. There is little to no faith in foresight.
A recent Retirement Reality report released by the financial services provider 10X Investments suggests that the retirement crisis is getting worse, with even fewer people preparing for their golden years, than the same period last year. The findings were based on online surveys among 10,780 economically active South Africans with a monthly income in excess of R7,600.
It has become normal practice for local employees to cash in their retirement savings when changing jobs and buying things on credit is the purchase plan of choice. Rather than adopting a savings culture, consumers are taking on piles of debt to buy lifestyle niceties, and sometimes even acquiring everyday necessities.
The situation in South Africa is rather dire, with a savings rate at almost zero. The lack of retirement planning should be a cause for concern, but it is never too late to begin turning things around.
The reality is that while not everyone has the financial means or discipline to begin saving for retirement in their 20s, the situation does increase in severity with each passing year, so the sooner you start the better.
Many people face a substantial drop in income once they retire – which is exacerbated by factors such as longevity, inflation and medical costs. “We are living into our 80s and beyond, which means our money has to last us for 20 or more years after retirement; and at an inflation rate of 6%, the purchasing power of money will halve in 12 years,” according to research by one of the large financial services groups in SA.
Adding to this is the likelihood that medical expenses will sky-rocket in old age, with 60% or more of medical costs occurring after the age of 60.
For the individuals in the older age band, your trepidation at nearing retirement age with very little saved is understandable, but the good news is that your situation isn’t hopeless.
The first thing all late bloomers need to do, is stop beating themselves up for waking up late to the financial fact. Focusing on the past is a waste of time, it won’t change your situation. The time has come to apply the lessons learnt from mistakes made in the past.
The bad news, however, is that there is no silver bullet to recover the opportunity cost of bad decisions. There is also no concrete formula to know how much each person needs to save to catch up for the future.
Obviously, the more you save the better, and the quicker you start doing it, the best. But to get a clear vision of where you are headed, you need to know what and where the goalposts are. It’s the first step to every person’s financial plan.
Advised clients can improve on their retirement income by up to 31%, according to research, compared to those who are not advised. This is because a professional will assist in determining the capital required to retirement, the progress made over time, and identify the gaps that still need to be covered.
Because of the shortened time frame, the most apt investment strategy in terms of risk would have to be discussed in detail with an advisor, who will also incorporate your unique personal circumstances.
This conversation will include the tax incentives available to you, as well as suggestions on investment schemes and portfolio misses.
If possible, supplement your income and use this income entirely for savings.
Continuing to work can help in other ways too. You have more years to salt away money for retirement, and your nest egg has more time to rack up investment gains and grow before you tap it.
That is the easy part. To go from saving virtually nothing to saving consistently and diligently and cutting down on some lifestyle comforts will be much harder.
It is imperative to clear debt as soon as possible, especially the high interest-bearing kind like credit cards or vehicle finance. At the same time, increase your contributions to your company pension fund and/or your retirement annuity.
You need to revisit and update your retirement plan at least once a year with your adviser to make sure that your investments are performing as expected, and that everything is on track. You also need to ensure that you keep your adviser up to date with any changes in your life – such as a change in marital status or a new job – as this will impact your retirement plan.