Retirement is a word that usually conjures up images of wrinkly grey-haired people sitting around with little to do in a communal lounge. But, the reality is many of us will leave formal employment long before we need to check in to an old age home.
And, sadly, most of us will not have enough money squirrelled away to cater for those travelling, relaxing lifestyles that are projected on every long-term investment brochure – even though we’ve spent many years exploring our options and trying to grow our wealth. Money expert Barry Hugo of Seed Investments explains some of the reasons we will never have enough retirement money.
Fifty-five is increasingly the new sixty-five, thanks to employment trends that favour the young. Sixty-five is the new fifty-five as our beloved offspring remain in the nest far later than we did.
And, as we earn less and spend more in our 50s and 60s than our parents, inflation and investments that don’t pan out the way we had hoped will also play their role in eroding our savings. We are healthier these days too, so we can expect our money to have to stretch over a much longer period than previous generations had to worry about.
What can you do about this scary problem? Barry Hugo isn’t an advocate of telling your boss to jump in the lake this week – even if you think the sentiment is deserved and you feel ready for a career change. Having a job you don’t like is better than not having a job, he cautions.
If you’re still very young, or have just started working, do even more to save and invest than you think is necessary. Unfortunately, you can leave saving too late – and in this era you should be planning to retire at 55. – JC
Retirement money: Five reasons you’ll never have enough
By Barry Hugo
At the best of times retirement planning tends to be a stressful exercise, over the last couple of years successful retirement has become nearly impossible for most individuals in South Africa.
There are a number of reasons for this and these various factors have combined to create “The Perfect Storm” for South African pensioners and financial advisors.
Let us have a look at the factors:
Retiring Earlier
There has been a tendency for a lot of South Africans to take early retirement, we won’t go into the various reasons for that now, but 20 years ago most people retired at the age of 65. It is now not uncommon for people to take early retirement packages at the age of 55; this extra ten years in retirement and ten years less of saving puts a huge strain on retirement capital.
Retirees living longer
It is a well-known fact that, with the advances in nutrition and medical sciences, people are living longer. This means that people are often in retirement for a period longer than their working careers.
Low Interest Rates
Because real interest rates are negative i.e. below inflation, retirees need to invest in “higher risk assets”. Whilst these assets offer the prospect of real returns, they are a lot more volatile than cash and this volatility adds to the many concerns already experienced by pensioners.
The second concern abou low interest rates is that it is more difficult to achieve higher returns in a low interest rate environment. This factor has been exacerbated by the fact that very few people are on defined benefit retirement funds so most retirees now carry the investment risk. On a defined benefit pension fund the investment risk sits with the employer.
Even people purchasing guarantees at these low rates are at risk. They are exposed to huge uncertainty going forward should we see later large inflation increases because they have been locked into these low rates.
Different inflation rates
Whilst the official South African inflation rate has remained under control, most individuals have seen huge inflationary pressure on their cost of living. Electricity, petrol prices and medical expenses are just a few of the normal day to day expenses which have seen increases way in excess of the official inflation rates. This erodes the purchasing power of the retirees’ future income.
Starting families later
In the 1960s it was common place for couples to start their families in their early twenties, lately it is not uncommon to see forty year olds bleary eyed from the effects of late night “pyjama drills”. This means that your average 60-year-old often still has children who are financially dependent.
As you can see, this lethal cocktail of factors has made a secure retirement a reality for only a select few.
“What can be done about this?” I hear you ask. Firstly, remember no matter how frustrating your job is, no matter how irritating useless or incompetent your boss is, a bad day at the office is a lot better than having insufficient retirement capital and spending your “golden years” under the breadline.
So, always try and work for as long as possible. Working longer has a double benefit on your retirement savings, firstly you are saving for longer and your capital has more time to grow and secondly you are drawing down on your capital for a shorter period of time.
The second way to get around it is obviously to start saving early enough; unfortunately this cannot be rectified like it was in the “good old days” where people were able to “buy back” years of service.
Most importantly, one needs to have a plan, the plan should include when you are planning to retire, how much income you need to retire with, what capital do you have at the moment and what returns are required to achieve all of these goals. If you timeously start with this plan and constantly assess your progress, you could be one of the select few spending your golden years above the bread line.
About Barry Hugo, CA(SA), CFP:
Barry started his career with Profplan Brokers, an independent boutique brokerage in Zululand, in 1994 and became the Managing Partner and a Senior Shareholder before leaving in 2007. He joined RMB Private Bank as a Wealth Manager and gained extensive experience in the structure and implementation of wealth management solutions for high net worth individuals and institutional clients. In 2011 Barry joined the Hereford Group to head up the Wealth Management Division in Durban.
Barry is a Wealth Manager and sits on the Investment Committee at Seed Investments.
