Is retirement just one big financial emergency?

2015-07-21 07:02

Somebody recently posted a question on the WellSpent Q&A, asking how much they should be saving toward their retirement. While the answer given was fairly straightforward, I think it appropriate to take one step back and look at the notion of ‘retirement’ afresh.

Few words in personal finance evoke as much fear, excitement and shoulder-shrugging as retirement does, and justifiably so.

For some, it’s the day you give your employer the middle finger after the obligatory farewell lunch at the office canteen, and move on to spending lazy days indulging in your hobbies. Perhaps you’ll spend more time with your grandkids. Maybe some travel from time to time?

For others, retirement is something that is thought not to apply. Maybe you enjoy your line of work so much that you imagine yourself working for as long as your employer would have you, or for as long as your colleagues still take you seriously. But how long is that?

For many though, retirement is a scary time with many unknowns, coupled with recognizable shortcomings in one’s personal finances. It’s a time when the prospect of being financially independent could not be further from reality.

The fact that retirement means different things to different people, does not however excuse you from taking responsibility for one critical aspect of it all – how you pay for it.

Want to work forever? Well, you probably can’t.

I’ve always thought of retirement as a thing we all one day do, when we no longer earn a salary. With a definition like this, you may think that you’ll never retire, at least not if you expect to keep working forever. The problem is getting the timing right. In an ideal world, we decide when to stop working, how our health holds up and what the job-market for senior widget makers is.

Unfortunately it’s not as simple as deciding to work forever, as many people are forced to retire much earlier than they had anticipated. In a recent and very comprehensive survey of American retirees, 68% of the respondents indicated a desire to work past the age of 65, whereas only 25% actually did. Reasons cited included health issues and structural changes at their employer.

Alternatively, retirement could be thought of as not what you do when you stop working; rather, it’s what you do when you’re no longer able to work. This definition is perhaps more appropriate than the first, as it introduces the concept of a non-agreed-upon retirement date. To assume that you’ll get to retire on your terms might be misguided.

Is retirement just one big financial emergency?

In this article on creating an emergency fund, WellSpent talked about setting aside cash for a rainy day. They linked the sum of your emergency fund to your monthly expenses, which allowed you to insure yourself against the more dire scenario of being unable to work for an extended period of time.

Perhaps retirement should be approached as nothing more than an unknown and extended period of time wherein you’ll never earn a salary, necessitating the mother of all emergency funds?

Saving for an emergency fund was easy in that you got to define the quantum.  But how does one save for being unemployed, for forever, and not knowing when forever starts?

Why you need to fund your retirement

Unlike many first world countries, South Africa has no meaningful social security system. Our government won’t pay and cannot afford to pay you a healthy monthly annuity that will see you carry on spending your time like you used to - before you stopped working. Our government currently pays a small monthly retirement grant to citizens over the age of 60, and only if you and your spouse earn very little. By last accounts, this grant amounted to about R1, 400 a month.

If you are to enjoy the retirement you’d always hoped for, you’ll need to pay for it yourself. There are no shortcuts or special savings vehicles that’ll allow you to jump the queue.

Building an adequate retirement plan takes decades, and it’s boring. Similarly, accumulating enough is not difficult, but it requires discipline.

Late starters

There’ll be many of you who have not yet started saving for retirement, or who acknowledge that your efforts to date may be lacking. I’m not here to judge, but I do want to help.

There is the temptation to bury one’s head in the sand, especially when you plug some numbers into a nifty retirement calculator that tells you you’ll need more zeros than seems possible. For the younger readers, it’s convenient to assume that you have plenty of time left and that saving for retirement can wait.

Each year that passes though, offers you less and less opportunity to take advantage of the single biggest and most critical ingredient in long term saving – compounding.

If you take anything away from appreciating the power of compounding, it’s that time is money and rather than lament your fate for having not saved to date, consider rather what your future holds if you continue to do nothing.

Choosing not to start saving towards your retirement or delaying your starting efforts, only makes the situation worse.

It’s not that difficult, and it’s not that risky.

I understand that assessing financial products is confusing and scary. There has been much abuse of savers and the public at large in decades gone by, by errant brokers and salesmen, but the retirement industry is a different place now. There are good laws to protect you from shady and inappropriate advice, and more are on the way.

As you will hopefully come to learn as I continue to write, retirement is about controlling what you can, mitigating risks, adopting sound financial principles, seeking good advice at the right time and accepting accountability for your own financial future.

You must take it upon yourself to take ownership of your financial position and adopt a Finance DIY attitude. Nobody will do that for you – it’s not their business to, and ultimately, nobody is going to care more about your money than you do.

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