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By Sonia du Plessis *
Far too many people see retirement planning as a topic cloaked in mystery and myth. It’s no wonder so few South Africans can have the comfortable retirement they deserve. All too often, fear of the unknown paralyses us into making wrong decisions or taking no action at all.
The reality is not nearly as scary. If you stick to your financial plan, you should be able to meet your retirement goals. The trick, however, is to have a financial plan you can follow.
I work with investors daily who have come to appreciate the power of a financial plan. Many had previously been too scared of making the wrong decisions, but today they know their financial goals. Most importantly, they know how far along the journey they are and what they need to do if they’ve wandered off the path.
It’s surprisingly easy to lose your way if you make uninformed decisions. To help you stay on the right path, I’ve gathered 6 common myths that could lead you astray if you believe them.
Myth 1: I’ll delay saving until I’m older and earn more
The major problem with this thinking is that you’re losing out on the power of compounding interest and the value of investments growing over time.
Compound interest can dramatically improve investment outcomes. Figure 1 shows that by investing R1000 a month from birth to age 65, Suzy’s investment – growing at 10% per annum – amounts to a staggering R78.2 million (from a total contribution of R780 000). Karen, who also invests R1000 a month, only starts investing at 21. Her investment also grows by 10% per annum, but she ends up with significantly less at retirement age, netting only R9.5 million (from a total contribution of R528 000). Source: Ninety One
Starting early in your career allows you to take a more aggressive investment approach that will deliver stronger returns over the long term. Balancing debt payments with retirement savings is possible and advisable, especially considering the increasing life expectancy. Human beings are creatures of habit; we need to start the habit of saving as early as possible – as soon as you receive that first paycheck. Also, don’t tell yourself the lie that you don’t have the cash flow to save. Prioritise yourself, cut down on some luxuries and start by saving a small amount.
Read also: Forget the present, focus on the future
Myth 2: My company pension will take care of my retirement
The danger in believing this myth is that you might find out too late that your company pension won’t be enough to see you through retirement. You could avoid this pitfall if you have a financial plan showing you whether you’re on track.
Sadly, the reality is that company pension funds do not always provide enough for you to retire comfortably. You can overcome this by exploring your investment options, like an external pension fund or discretionary investment portfolio.
Contributions to retirement products will reduce your taxable income and are one of the few areas where SARS gives South Africans some tax relief – use it!
Myth 3: Retirement means the end of work
Retirement doesn’t always mean the end of your professional life. Many people work part-time, engage in hobbies, or even start new careers after retirement.
Sometimes this decision is forced on them if they don’t have enough saved. But other times, they must stay busy and pursue personal passions, which means their golden years are as busy as before retirement.
And, if you do start a business venture to boost your retirement savings, I’d strongly recommend that you not use your retirement savings to fund this. Way too many pensioners have lost their savings in failed business ventures.
Myth 4: I’ll retire at age 65
For as long as we can remember, the retirement age has been pegged at 65. The truth is that many of us will probably only retire closer to age 70. For some, that decision will be driven by the need to save more for retirement, while others are still enjoying a successful career that allows them to continue working for longer.
No hard and fast rules prevent you from working beyond 65. So, if you’re still feeling fit, strong and motivated, you have no reason to stop working.
Read also: The road to financial independence for women
Myth 5: My expected lifespan is 75-85 years
As I’ve mentioned, we’re living longer than earlier generations due to medical advancements and healthier lifestyles. That means you need to cater for this in your retirement plan.
So, rather than planning for retirement of 15 or 20 years, you now need to save enough for 25 or 30 years of retirement. This depends on how old you are when you retire, with more savings needed if you call it quits at 65.
Myth 6: I can count on historical returns
It’s easy to believe that we can count on historical investment returns to understand future returns. Unfortunately, the future is unknown and unpredictable. This means you cannot take it for granted that you will get the 7% – 13% growth in the long-term average returns from equities.
Working with a financial advisor, you can plan different scenarios to see what impact lower (or higher) returns will have on your retirement savings. By considering different options, you can plan accordingly to ensure you’re not caught short.
Planning for your retirement shouldn’t be a guessing game. Hopefully, these tips on retirement myths will help you understand some of the pitfalls that await you if you’re not properly prepared.
My advice would be to, firstly, have a financial plan. If you know where you are and where you’re going, you can adapt to the path that you’re on to make sure you reach your destination. Secondly, I would urge you to partner with a financial advisor able to guide you along this path.
Your retirement journey doesn’t have to be shrouded in mystery. You have the power to take charge of your future, and I strongly encourage you to do just that.
* Sonia du Plessis, CFP®, is Head of Brenthurst Wealth Stellenbosch
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