Done correctly, retirement planning is a client-specific blend of finances, lifestyle goals, health status, life expectancy and investment assumptions. The retirement planning industry is rife with generalisations and rules-of-thumb which, if too quickly accepted as fact, can have dire consequences for your retirement. When it comes to putting your retirement plans in place, don’t bank on these so-called facts:
I can delay saving for retirement until I am earning more money
The longer you avoid using the magic of compound interest to enhance your wealth, the more difficult it is to overcome the delay. If you delay saving for retirement, you are faced with the challenge of making up for lost time, which is exacerbated by the loss of compound interest. According to head of distribution at Allan Gray, in order to draw 75% of your current income by age 65, assuming investment returns of inflation plus 5% per year, you will need to save as follows:
- You will need to save 15% of your gross income from age 25
- You will need to invest 22% of your gross income from the age of 30
- If you start saving at age 35, you will need to invest 30% of your gross income
- At age 40, you will need to begin investing 41% of your gross income
- By age 45, you will need to save 58% of your gross income which is both unrealistic and unsustainable
A recent World Bank report called South Africans the biggest borrowers in the world declaring that, in 2014, 86% of South Africans borrowed money. As a generation of conspicuous consumers, many people have grown accustomed to displaying the new BMW in the driveway whilst defaulting on the home loan at the same time. The 2015 Sanlam Benchmark Survey found that, on average, pensioners received retirement advice for the first time only ten years before retirement. If you are not on track to meet your retirement goals at age 55 (assuming a planned retirement at age 65), it is going to be incredibly challenging to find sufficient disposable income at that stage to close the funding gap.
My company pension fund will be enough for my retirement
This is a dated mindset from the job-for-life generation where 40 years of loyal employment assured you ten years of retirement. This generation is faced with the reality of working for 40 years to save for a retirement that could potentially last 35 years. A 2013 Sanlam Benchmark Survey found that 62% of employees do not reinvest their retirement savings when they change jobs or get retrenched. Of these, 63% used their benefits to reduce debt while 33% used some of the benefits to help cover daily living expenses. According to the US Bureau of Labor Statistics, the average worker currently holds ten different jobs before the age of 40 and will hold between 12 and 15 jobs in their lifetime. This means that the average worker will face the temptation of withdrawing their retirement savings between 12 and 15 times before they retire. An Allan Gray survey of living annuity clients showed that 70% are likely to run out of money before they die, 30% of working South Africans have no formal retirement provision and only 6% of South Africans can maintain their standard of living in retirement.
My spouse is investing for our retirement
This is an especially dangerous assumption to make and one that often leaves stay-at-home mothers (or fathers) in vulnerable financial positions. Assuming that the breadwinner in the family is on top of the retirement planning is irresponsible to say the least. Regardless of who generates the income, every couple needs to form a joint retirement plan for the partnership. According to a recent Sanlam Benchmark Survey, only one-third of females have considered that they may live longer in retirement than their male counterparts, and only 15% have considered how earning a lower salary may affect their retirement savings adequacy. The survey also found that only 56% of married couples or couples living together plan for a joint retirement, which means that the remaining 44% of couples are either going it alone or not planning at all.
I must retire at age 65
The age of 65 holds no magic and at best has been relegated to a tax event. 58% of South Africans expect to continue working for pay after age 65, with the majority being forced to do so out of financial necessity. Why? Because only 54% of South Africans who are currently 10 years or less away from retirement are saving for retirement. US retirement expert, Mitch Anthony, says, “The lie behind the whole retirement model is that our age predicts our usefulness”. A person with forty years experience cannot suddenly become economically redundant. You may be required to ‘retire’ from your pension or provident fund when you reach age 65 in order to purchase an annuity, but the age at which you choose to stop working for pay is at your discretion.
Increased health and longevity coupled with the need to remain active and engaged means that more people over the age of 65 are active participants in the labour market. 2017 retirement statistics in the US show that 19% of people over the age of 65 are still working, at least on a part-time basis (Bloomberg, July 2017). In fact, it is anticipated that by 2024 around 36% of 65 – 69 years olds in America will be economically active. Longer lives, escalating healthcare costs and challenging economic times have made working well beyond the age of 65 a reality for most South Africans.
My life expectancy is 85
As a result of medical improvements, age-related chronic diseases such as heart disease, certain cancers and diabetes have risen, and illnesses such as Dementia and Alzheimer’s are expected to double every twenty years. A person can now live many years whilst suffering from any of these illnesses and the associated costs can be exorbitant. Adrian Gore (CEO of Discovery) says that as you live longer, your life expectancy grows. “So, for example, if you reach age 65, your life expectancy goes up to 82 or 84. If you live to 85, your life expectancy goes up to 91”, he says. “Discovery statistics show that if you are 40 years old, you are likely to spend 42% of your life in retirement. If you are 35, 38% of your future will be in retirement years”. Interestingly, although familial history plays a part of estimating longevity, medical researchers now believe that your health and lifestyle at middle age is a large determinant of how long you will live. To ensure that our clients don’t outlive their capital, we generally work towards an assumed life expectancy of age 100.
I’ll need 75% of my current income in retirement
This assumes a number of things, including that you will be debt-free in retirement. Medical costs have historically outstripped inflation by about 4%, and healthcare and medical expenses should be budgeted to increase by at least 10% per year. Jeanette Marais, head of distribution and client services at Allan Gray anticipates that seventeen times your last gross annual salary is believed to be a sufficient amount of capital to provide you with 75% of your pre-retirement income. An industry rule of thumb suggests the following:
- After working for 10 years: Your saved capital should be equal to two years’ salary
- After working for 20 years: You should have saved five times your annual salary
- After working 30 years: You should have saved 10 times your annual salary
- After working for 40 years: You should have saved 17 times your annual salary
These are ball-park guidelines to be used as a starting point for retirement funding discussions. The reality is that every retiree has a unique set of personal circumstances which can quite dramatically adjust this so-called norm. Financially dependent adult children, a special needs child, disability, early onset of Dementia or the need for private nursing can increase your post-retirement expenditure enormously and we would caution against relying on ball-parks.
I’ll enjoy having so much spare time in retirement
A 2012 study performed at University of California, Berkeley, found that male retirees experienced high levels of satisfaction immediately after their retirement, but that this satisfaction waned after a few years. There is also strong evidence to suggest that retirement dramatically increases the probability of clinical depression by as much as 40%. More than the actual work or the money, researchers believe that many retirees miss the socialisation and self-esteem that come hand-in-hand with a meaningful day’s work, coupled with a loss of identity. The structure and sense of purpose that comes with working are important for mental well-being. Worth contemplating is that every day in retirement feels like a Saturday, without the rugby match. The definition of ‘leisure’ in retirement is completely redefined. According to retirement expert, Mitch Anthony, “The reason golf is so much fun to so many people – or whatever their leisure activity is – is because it means you aren’t at work. When you remove your work, your leisure becomes work. It doesn’t matter how much money you have in retirement, it doesn’t give you purpose.”
By design, a retirement plan should be personal, intentional and devoid of unfounded assumptions. Set aside the general rules and get specific about the retirement you intend living. A year from now, you may wish you had started today.
Have a wonderful evening.