Plan for the worst and be positively surprised
Just six in every 100 South Africans retire comfortably without financial assistance from others, according to a recent report. About 47% depend on family members or friends for financial support when they reach retirement age and 16% will be completely dependent on state pensions. For a large 31%, retirement is not an option, and they will need to keep working to keep a roof over their head and food on the table. Sanlam’s Benchmark Retirement Survey predicts that in the next generation, nine out of 10 South Africans who belong to a retirement fund will not have enough to retire on.
The right advice from the start
There is no magical retirement savings goal to aim for that will guarantee a comfortable retirement or, at the very least, allow the option of retiring at all. Since each person’s needs, lifestyle and demands on their income are different, it is best to begin retirement planning by consulting a financial adviser who will be able to compile a comprehensive needs analysis based on an individual’s unique information. A reputable consultant will also be able to give the best advice about how to avoid paying too much tax and how to access funds when they are needed without penalty or restriction, and help effectively navigate the wide range of retirement products on the market.
Rands and sense
It is generally accepted that at the retirement age of 65, a person will need 15 times their current salary to retire. If there is outstanding debt or higher medical expenses, this figure would need to be increased.
Traditionally, when beginning to save for retirement young people are told to save 10% of their gross monthly salary. This means that R1000 should be saved towards retirement on a salary of R10 000 before deductions.
These calculations do not take into account that, after the economic downturn in 2008, the world’s economy will take many years to recover and will heavily influence the growth rate of assets, including shares and property. Retirement planning is based on assumptions about capital growth, provided mainly through shares. In times of slow growth in which shares grow by just six to 10% per annum, this means retirement capital might not beat inflation or be sufficient to meet monthly expenses. South African short term loans providers, like wonga.co.za, are able to provide temporary solutions to cash flow problems.
The new thinking behind retirement
Warren Ingram, Financial Planning Institute of Southern Africa’s 2011 Financial Planner of the Year and director of Galileo Capital, believes the thinking behind the 10% per month saving for retirement, needs to change. This is based on a new study, ‘Towards a Sustainable Retirement Plan’, by Daniel R Wessels, which recommends that 16% of total salary should be saved each month towards retirement security – a far higher percentage than most people save at present. So, R 1 600 should be saved from a R10 000 gross salary each month.
The way many advisers calculate sufficient capital to retire is based on a multiple of your final salary. For example, if you earn R120 000 in the last year before retirement; you need 14 x R120 000 = R1.68m to pay out R98 000 per year. Ingram advises using actual monthly expenses to calculate retirement capital. If you need R10 000 per month after tax; you should multiply this by 12 to get an annual amount, and multiply this by 20 = R2.4m. This allows R10 000 to be drawn from capital each month and to increase this with inflation each year. According to the Wessels study, even this is a conservative calculation and his findings suggest that R2.664m is needed in order to be certain that you have sufficient capital in all market conditions.
What to do when it isn’t enough
In order to catch up on savings, Heather Robertson, a consultant at Blink Consulting, advises investing extra funds into a pension fund or retirement annuity where the growth is tax free and the lion’s share of contributions is subsidised by a tax refund. Debts can be reduced and an emergency savings account built up. She also advises analysis of the financial risks of retirement. “To get an accurate picture of what your retirement will look like, you should first understand the biggest financial risks that could compromise your standard of living once you retire,” she says. “These include the fact that a longer lifespan would require savings to last longer, inflation will erode the purchasing power of today’s rands, along with the rising cost of medical aid and private healthcare.”
Ingram believes a person should always be pessimistic in retirement planning, trying to plan for the worst and being positively surprised. He also advises that those nearing retirement, work in a few extra years or look for part time work to supplement their retirement capital. “People are generally living much longer than previous generations but their retirement planning has not kept pace with this reality,” he says. “The worst thing you can do now is put your head in the sand and hope for things to get better.”