The world is changing fast and to keep up you need local knowledge with global context.
Time to recalibrate our thinking on retirement age
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By Leslie Greyling*
With average life expectancies in certain regions around the world reaching nearly 90 years, isn’t it time we relooked at the retirement age? This might sound like a crazy idea but there are two very good reasons why you would benefit.
For one, we are living far longer than previous generations thanks to lifestyle improvements and medical advances.
A 65-year-old today is very different from someone of that age 20, 30 or 50 years ago. In fact, the global average life expectancy in the 1950s was only 48 years, which jumped to 60 if you lived in a developed country.
The second reason it pays not to retire early is that it lightens the financial load that living to 90 would place on your savings. Statistics and demographics aside, the demands on your retirement savings become far greater the earlier you retire.
But rather than spinning you a tale about the horror that awaits you if you retire too early, let us look at how delaying your retirement plays to your advantage.
Life expectancy realities for South Africans
Before exploring the different scenarios, let us look at the shift in life expectancies.
Globally, the average life expectancy is now 73 years (71 for males and 75 for females), with developed countries averaging between 85 and 88 years. In South Africa, the latest data suggests the average life expectancy is only 64.7 (62.2 for males and 67.2 for females) years.
The major cause of deaths (±30%) in South Africa is non-communicable diseases like heart attacks and stroke, cancers, chronic respiratory diseases and diabetes. So, if you are relatively healthy and can invest in living healthily, chances are pretty good that you will live well beyond the nation’s average.
The reality is that half of the current population of 50-year-olds will live beyond 80. So, if you retire at 65, your retirement savings need to see you through at least another 15 years and quite possibly another 10 beyond that.
Work longer to enjoy living longer
It makes sense then that continuing to work and save a little longer will benefit you in the long run. Continuing to be gainfully employed until you are 70 might sound like madness to some but let us look at examples of the numbers involved in one hypothetical scenario.
Let us say you are currently 50 and have a retirement fund worth R4m, to which you are contributing R5,000 a month.
On the assumption that your investment had grown at 6% a year, you would have just shy of R6m if you choose to retire at 55. This sum would provide you with monthly income of about R19,000 if you withdraw 4% a year.
Given the same monthly contribution, growth and drawdown rates, your monthly income would grow to R27,000 if you retired at 60. Delay that by another 5 years and you would be earning about R37,000 a month and more than R51,000 if you retired only at 70.
You also need to remember the tax implications. The monthly income is subject to income tax.
Something to always remember when looking at future values is that they may seem impressive, until you factor in the impact of inflation on your buying power. In an ideal scenario, your retirement savings should be enough to sustain your lifestyle when you stopped working.
This ‘ideal scenario’ is one that advisors always aim to achieve for the investors they work with. The amounts involved will vary from one person to the other, but we are forever trying to find the right balance between risk and reward so that you can retire without major financial concerns.
There are several funds available that can be used to structure balanced portfolios that maximise growth in pre-retirement years and provide greater certainty of income thereafter. It is advisable to consult a qualified, accredited advisor to guide you for a solution that will suit your circumstances.
Taking the right action today can pay huge dividends by the time you finally do decide to retire.
DO NOTE: The numbers provided are for illustration purposes and may differ depending on market fluctuations.
- Leslie Greyling is a financial advisor at Brenthurst Fourways. [email protected]
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