OPINION | When Covid-19 means early retirement has come knocking

Consumers who reduce their savings due to the impact of the 1 percentage point VAT increase will lose out on compound interest, notes an expert.
Consumers who reduce their savings due to the impact of the 1 percentage point VAT increase will lose out on compound interest, notes an expert.
  • The coronavirus pandemic has forced some into early retirement, and has led others to consider it more strongly as an option.
  • If you retire early, you will need to manage your finances accordingly. 
  • A large number of early retirements will also have broader economic implications.

The global Covid-19 pandemic has forced all of us to reconsider what we value. Our priorities have been rearranged from a world of excess. Trust and stability are being questioned of our traditional structures of governments and corporates. It is a time when the value of people and our planet is increasingly being recognised.

The decision to retire early, before the age of 65, is also becoming more popular. For many, Covid-19 has been a factor – whether they have retired at their own discretion, or whether the decision was forced upon them by their changing circumstances.

Those retiring early due to the impact of the coronavirus pandemic usually fall into one of two broad groups.

Forced retirement

These individuals have been forced to take early retirement due concerns of catching the virus or concerns about their future earnings as a result of the pandemic.

Older adults and people who have severe underlying medical conditions are at higher risk for developing more serious complications from Covid-19 illness and may consider early retirement as a solution to protect their health.

Uncertainty around recovery and growth of future earnings may see many business owners feel that the risk is not worth the effort and may consider selling or closing their businesses.

The same can be said of employees opting for retrenchment packages as they fear the future viabilities of their employer.

Discretionary retirement

This is for those more fortunate individuals who have considered an early retirement based on their own discretion.

They probably have enough retirement savings in place and may want to add new purpose to their life by pursuing lifelong dreams or goals such as a new business venture or local travel.

If they don't have quite enough to retire, they are willing or able to change their lifestyle accordingly as they follow a life that is more relevant for them by spending more time with family or assisting others in need.

Have you saved enough? For long enough?

If you have the option to choose, you must ask yourself first if you have saved enough, for long enough. The amount of money one saves for retirement is hugely important as it will dedicate how much you are able to receive as an income during your retirement.

The longer your savings are invested, the more it has time to experience compounded growth: "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it."

Early retirement means a longer retirement

Assuming you retire early, you will need to manage your finances accordingly. An early retirement means a longer retirement which in turn returns requires a larger amount invested for longer time.

Generally, retirement savings are invested in relatively risky assets such as shares to ensure high compounded growth over the long-term. These asset classes are extremely volatile in a world of uncertainty with many of them currently being in the red.

Should one be forced into early retirement, you will need to switch some of your investments into more stable assets, such as cash.

This switching may result in selling some of one’s risky assets at a loss, which decreases one’s savings and ultimately one’s retirement income.

Other considerations

Is it going to be good for your well-being?

Is early retirement a good thing from a mental health perspective? If it is to provide one with greater purpose and self-worth, then yes. And, from a physical health perspective, if it is to preserve one’s health, then yes.

Travelling is often cited as a reason for early retirement. The uncertainty around the future of international travel and the costs associated should not be a factor; however, travelling locally should be.

South Africa boasts one of the most diverse cultural and geographical landscapes in the world. Our love for conservation ensures that we have multiple public and private national parks to explore.

If it is economically viable for someone to take early retirement so that they can explore the country’s natural treasures and people, then it is a good move.

The bigger picture

More people taking early retirement, also means an increase in unemployment, which means less tax for the system, and more dependents on the state.

One could argue that early retirement creates opportunities for younger generations entering the workplace which could relieve some of South Africa’s youth unemployment crisis. In other words, whilst an early retirement might mean lower income from one’s investments in retirement, it could open opportunities for the unemployed youth of our country.

On the other hand, you can’t put a price on the "university of experience" and while we need to create jobs for the youth of South Africa and to capitalise on their innovative and diverse views, wisdom is also needed for execution of these ideas. In addition, many businesses are realising that it is no longer about bottom-line profits but the ESG framework on how those profits are realised.

So, if you can answer yes to all three questions: "Do I have a purpose / is this for my mental health?",  "Do I have a financial adviser to be my 'finance doctor' in retirement?", and "Do I have a financial plan to keep me on track?", then go for it.

Richard Bray is head of strategy and positioning at Amplify Investment Partners, a wholly owned subsidiary of Sanlam Investment Holdings. Views expressed are his own.

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