When you were in your twenties, planning for your retirement seemed like a lofty goal, but as the years go by, the practical question of funding your retirement becomes very real, very quickly.
This article examines the plight of investors who are starting to wonder if their company retirement benefit is going to be enough to tide them through their retirement years. The FPI’s Financial Planner of the Year 2018, Mark MacSymon of Private Client Holdings, says the sooner you start saving, the better.
First, if you have never contributed to a retirement annuity, preferring to rely solely on your retirement savings made via your employer, you should contact a qualified financial adviser as soon as possible. MacSymon suggests you ask your adviser the following questions:
- How much should I be contributing toward retirement savings on a monthly basis to achieve my retirement objectives? Remember that the answer to this question will vary from person to person depending on desired income, travel, medical, lifestyle and legacy goals.
- What are the most tax-efficient ways of saving and investing for retirement?
- Could a tax-free savings account (TFSA) be used to complement a drawdown strategy in retirement that minimises tax?
- Would a guaranteed annuity or a living annuity be more suited to achieving my investment objectives and why?
- Depending on whether a guaranteed or a living annuity is appropriate, how would asset allocation change the closer one gets toward retirement?
How much should you be saving?
The general rule of thumb in South Africa is that you need to be able to replace 75% of your income to retire comfortably. This assumption relies on the fact that you won’t have a home loan or any other large debt by that age, which means your monthly expenses will be lower. But, increasingly, financial planners are beginning to work on a 90% replacement ratio, especially since medical expenses tend to rise after retirement.
MacSymon says if you currently earn a net salary of R38 000 a month; plan to retire at or around the year 2028 (ten years’ time) and are targeting the conservative income replacement ratio of 75%, the amount you save each month will vary depending on the amount of capital you have already saved. At minimum, the lump sum required to achieve this after-tax income objective is roughly R6.5 million in today’s money terms.
For example, if you have already accumulated assets totaling R4 million today, you would have to save at least R1 755 each month (increasing contributions annually at 6%) to achieve your desired income. However, using the same assumptions, if you have saved only R2 million today, you will need to comparably save R22 200 on a monthly basis to achieve the same objective.
The good news is that the sooner you start contributing to your retirement savings in addition to your company pension fund, the easier it will be for you to play “catch-up”. If you use the exact same assumptions as the example above, and look at different life stages, the monthly savings required reduce significantly:
If you are 20 years away from retirement and have managed to accumulate assets of R2 million today, you would have to save R 5 323 each month.
If you are 25 years away from retirement and have managed to accumulate assets of R2 million today, you would have to save R2 061 each month.
“This simple exercise highlights two critical points. Firstly, the sooner provision is made for retirement, the easier it becomes to plan for the retirement stage and secondly, the later provision is made for retirement, the stronger the likelihood that an adjustment of living standards will have to be made,” MacSymon cautions.
Practical ways to catch up on your retirement savings
- Increase the amount you put towards your current retirement savings
You can do this by either increasing your premium or by taking out an additional product, such as a retirement annuity. Because you have a limited time frame within which to save, you may have to severely cut your spending budget so that you can increase your savings pool. This may mean increasing your monthly savings to as much as 25% of your salary. Be ruthless – cutting back on luxuries now could make a significant difference in terms of being able to maintain your living standards in retirement.
- A more aggressive investment strategy
A generally accepted rule has been to subtract your current age from 100 and have that percentage of your portfolio invested in equities – although these days many financial advisers advocate for the “110 rule” because we’re living longer. So, at age 30, you’d have 80%, at age 40, 70%, and so on. This de-risks your portfolio as you get older. If you start saving too late (or don’t have enough saved), you’re going to have to increase the equity portion of your portfolio. MacSymon says suitable regulation 28 compliant portfolios that have a net exposure to equities (local and global) of about 55% to 65%, with the balance diversified across other traditional assets classes, would be representative of the majority of investors in a similar position. “However, investors are unique. This is where the importance of quality financial planning, tailored to the individual, comes in. In determining the most appropriate investment strategy for you, your adviser must also assess your need for risk and your capacity for loss,” he says.
- Delaying your retirement
Because we’re living longer, it’s not uncommon to continue working (even part-time) into your seventies. The 2018 Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey showed that one-third (33 percent) of workers state that not having enough saved would be the most likely reason their retirement could be delayed, while three percent of current retirees said their retirement had been delayed due to insufficient savings. Invest in developing skills now that will allow you to freelance or work on a consult basis in your later years.
“The time for action is now. It’s never too late to do something.” - French writer, Antoine de Saint-Exupery.
This article is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider.