BY JUGGIE GOVENDER OF EAST COAST FINANCIAL SERVICES (Pty) LTD
STARTING to save early is the best plan, but there are many variables. Wising up to a few hard truths about providing an income in retirement will help ensure you are not one of the 95% of South Africans who will retire with a standard of living below that to which they are accustomed.
In order to target a sustainable pension that is equal to a certain percentage of your final salary — typically between 60% and 75% of that income — you need to save a certain percentage of your salary for a certain period and receive a certain level of above-inflation after-costs returns.
This will give you a level of savings that you can use to purchase a guaranteed pension that pays for life, or invest to generate an income.
If you invest to provide an income, the level of income you draw in retirement, the returns you earn and the order in which you earn them — are also key factors that will determine how long your pension will last. It is also important to take inflation into account at retirement.
LESS TIME TO SAVE
Our working lives are getting shorter and retirement years are getting longer. This means the number of years you have available to save for retirement has reduced dramatically. Many people are entering the workforce later following tertiary education and choosing to, or being forced to, retire earlier.
However, as a result of improved health and medical advances, people are living longer in retirement. When it comes to planning how much you need to save, women and couples have an added challenge. Statistics show that South African women outlive men by seven years on average. Couples thus need to plan for a retirement income that lasts at least seven years longer than the life expectancy of the man. Single women and women couples need to consider retiring later or saving more to provide for a retirement that could span 30 years. Increasing your exposure to growth assets such as equities and listed property — decreasing your after-inflation return to 1% by investing conservatively in cash or a fixed income fund while still drawing an income of 60% of what you earned before retirement — will reduce the number of years your income will provide a sustainable income to 15.8 years.
Increasing your real return to 6%, however, will increase the number of years you can provide a sustainable income to more than 30 years. If you are still young enough to begin saving early, this is the best way to boost your retirement savings, by harnessing the power of compound interest. Therefore, the ideal time to invest and take advantage of the power of compound interest is the moment you start your first job.
Your retirement fund aims to deliver a particular percentage of your income as pension at retirement after you save in it for 35 years and you reduce the years for which you save by just five years, you are likely to achieve 58% of the targeted pension.
Reducing the number of years for which you save by 10 years will result in you only achieving a third of the targeted pension.
Delaying your retirement or finding employment after retirement can help get you back on track if you started saving too late.
Earning enough to retire comfortably means you need to earn good inflation-beating returns, but beware of destroying your wealth by chasing top-performing funds. The returns you earn can make a massive difference to your retirement income because the effect is compounded over many years. It typically means finding a fund that will deliver good performance consistently and sticking with it through market cycles. This article is an excerpt from Business Time by Laura Du Preez. You could contact me on 083 399 3905, my office on 032 944 3051 or e-mail me on
email@example.com for an appointment or further information and any other financial advice.
The information is only intended to be of a general nature and should not be relied
upon by any part without obtaining full
details from a licenced financial service provider.