Publications
The number of people living to their nineties and early hundreds is growing by the day and the notion of retirement at 65 is becoming outdated. In a new book, author Wynand Gouws tackles how to provide for yourself if you live to a ripe old age - as is increasingly likely.
RETIREMENT
South African law does not stipulate a particular retirement age, and different pieces of regulation provide for different retirement ages. In terms of the traditional definition of retirement, people generally retire between age 55 and 65. This means people spend approximately 35 years preparing for retirement and are then assumed to spend 15 to 20 years in retirement. But because this assumption has become obsolete, we need to fundamentally rethink this traditional framework
Unfortunately, too few people spend enough time thinking about what retirement means to them and what their retirement journey may look like.
CHALLENGES THAT AFFECT RETIREMENT PLANNING
Several significant challenges accompany the current retirement framework, as research by several South African financial services providers shows. Here I summarise some of the key findings from surveys conducted by Old Mutual, Sanlam, Just South Africa and 10X Investments.
We do not save enough
Most studies on retirement planning indicate that only 6% to 10% of South Africans can retire financially secure. This means that fewer than one in ten people will be financially secure on retiring, and that 90% of retirees will need to reduce their expenses significantly and sell some of their assets to fund retirement. Many will end up depending on family or friends, and eventually rely on a state pension, or on a combination of these measures, in retirement.
Irrespective of your personal circumstances or wealth, appropriate financial planning remains important, as it will help you live your dream life instead of outliving your money. The life story of Jorge Guinle is a testament to this. Guinle, one of the last millionaire playboys, who died at age 88, was born into one of Brazil’s richest families.
His mission was to spend as much of his family’s fortune as he could, and he succeeded: "The secret to living well is to die without a cent in your pocket … But I miscalculated, and the money ran out too early."
Clearly, you do not need to be a millionaire to outlive your fortune. South Africans in the formal sector generally do not make appropriate provision for retirement. While the financial planning industry sometimes over-complicates retirement planning, the basic formula remains pretty simple:
Retirement success = early start + sufficient savings + healthy returns
Success in retirement depends on us taking particular actions we have control over. These include when we start saving, how much we save and the return we achieve. Some people argue that we do not have control over the return we achieve on our investments. They believe that although they might have saved for many years, even decades, their investments might suddenly perform badly. The good news is that investors can significantly influence the return they achieve by investing in an appropriate combination of inflation-beating growth assets. I cover this aspect of retirement planning in detail in Chapter 7.
As we move closer to retirement age, our ability to secure a carefree retirement is reduced significantly as the time we have left, and how much we can save over the remaining time, declines rapidly. Once you reach this stage, the two essential levers you have for securing a sustainable retirement income are reducing post-retirement spending and delaying retirement by working longer. This may not be what you had in mind for your retirement, but it may be the best way forward.
We start too late
Retirement planning is a long-term process, and ideally we should start saving for retirement when we earn our first salary. While this process becomes a lot more refined as you grow older, it is vital that you implement basic financial principles early on, in a straightforward way. Two essential habits are effective: consistent saving and constructive use of debt. I discuss these and other financial 'hacks' in Chapters 7 to 9.
As you approach retirement age and start refining your retirement strategy, the three critical variables that determine your income post-retirement are:
• accumulated retirement and other investments
• the income required at retirement
• you and your spouse’s or partner’s life expectancy.
Your required retirement income is a crucial element of your retirement plan. If you do not consider this part of the equation, the retirement-planning process becomes futile. Sadly, at least one in two people do not do this basic calculation of determining what income they will need and have no idea of their income requirements at retirement.
According to the Just Retirement Insights Survey of 2019, 53% of South Africans have not calculated how much they would need per year in retirement, and only 54% have a retirement budget at age 60 and over. Only 40% of under-60s have a retirement budget in place. A frightening 15% of respondents stated that they intended to rely on family in retirement – and gave this as the reason why they did not need a retirement budget.
So it comes as no surprise that few people approaching retirement are confident that they will have enough money to provide for their than 10% of people are actually certain that they will have enough money up to age 100.
The growth of the sandwich generation
There have been fundamental shifts in family dynamics over the past decade. Parents are finding that their children are staying at home for longer, and they are increasingly finding themselves responsible for looking after their own parents in retirement. People in this position, who are mostly in their forties or fifties, are known as the "sandwich generation".
One in two 18- to 34-year-olds today are still living with their parents. There are many reasons for this, including socioeconomic reasons and an inability to find gainful employment.
However, the additional expenses related to caring for your grown-up children and for your own parents can seriously devastate your retirement plans, and lead to serious income shortfalls during your own retirement. Even though it is natural to want to support and help family members, you need to do this in a considered way that takes into account your own long-term strategic financial goals. It requires open and honest conversations to ensure that all relevant options are explored, and that the implications of decisions are discussed and quantified.
It is essential to discuss viable alternatives with any grown-up children who are still staying at home. You might consider helping them attain personal development goals that will assist them in finding gainful employment. Grown-up children can also be expected to contribute to the family finances in the short term by taking on a part-time job, even if such a job is not their dream job or in their area of interest. This will help you free up much-needed savings for your own long-term retirement plans. It is essential to teach your children good financial habits from an early age, and to emphasise the importance of budgeting and managing a salary.
These discussions become more challenging when they concern parents or older family members who are staying on in your home. Even though circumstances may differ, it is vital to ensure that parents and others who share your home do not put strain on your retirement savings and on your ability to provide for yourself in the long term. It is thus equally important to have frank and open conversations with all older persons who live in your household. All should be contributing wherever possible. If you are carrying the bulk of the financial responsibility of looking after parents at home, you need to ensure that your siblings contribute towards your expenses.
Lifetime work is a thing of the past
Lifetime work is something of the past, with people increasingly moving between employers, changing careers, or even emigrating in search of better and more lucrative career opportunities. Even though career progression is something you should strive for, it is crucial to ensure that career moves do not destroy your wealth and accumulated savings. Moving from one employer to another often provides the opportunity and temptation to access accumulated pension fund savings. Accumulated pension savings can represent a significant amount, so it might be appealing to access them when making a career move – either to pay off debt, buy a coveted lifestyle asset such as a car or a house, or splurge on an overseas holiday.
Cashing in your pension when you change careers can be detrimental to your long-term retirement planning and can significantly affect your ability to remain financially secure in retirement. Research by Alexander Forbes indicates that only 9% of members preserve their pension savings when leaving an employer. This is a shocking statistic and explains the dire position of many retirees. So, even though it may be tempting, one of the best financial decisions you can make when changing employers is to preserve your pension.
Wynand Gouws has more than 30 years' experience in investment and retirement planning and holds an MBA and post-graduate studies in Future Studies. To 100 and Beyond is published by Penguin Books.
