We certainly do live in interesting times and, as financial planners, this period in the world of investing is being made increasingly interesting by the retirement renaissance that is unfolding before our very eyes. The largest generation in the history of the world is balanced on the precipice of their golden years and is set to redesign the world’s understanding of retirement. Although much uncertainty surrounds the entrance of the Baby Boomer generation into the world of retirementville, there are two certainties you can take to the bank – this generation is going to live longer than any other generation the world has ever seen, and they’re going to unquestionably retire like never before.
Researching the tomes of history enables much light-shedding when it comes to appreciating the full extent of current events, so let’s examine the past for a moment. If you are currently 65 years of age, in 1800 you would have been dead 27 years ago – at the ripe old age of 38. In 1900 you would have been dead 12 years ago having spent all of 53 years on planet earth. If you were born in 1940, the average life expectancy was 66 years, generously allowing you forty years to fund for your one retirement year – a feat that even the least experienced investor could probably manage. Looking at these numbers, it’s not difficult to appreciate why retirement planning is still such a relatively new concept in the world today!
Moving swiftly forward to our more current longevity reality, if you were 65 in the year 2000 you had between 12 and 15 years of retirement to fund for. If you are 65 this year, you have a 25% chance of living to the age of 97. That’s another impressive 32 years of retirement still to enjoy (and pay for). Children born in 2011 will have a 30% chance of living to 100, allowing them approximately 40 years of work to fund for 35 golden years.
So, you may ask, if we know all these interesting facts, what’s the problem? Other than the fact that retirees are now outliving their retirement funds the reality is that most people – despite the evidence – are still not funding for their retirement years. And, as shown above, your retirement years could be very, very long indeed. Having counselled and advised many people through their working careers and into retirement, we’ve determined that there are a number of key factors that prevent individuals from being adequately funded for their retirement. Here’s what we’ve found to be the five main factors preventing individuals from ensuring their golden years are indeed golden:
- Not having a game plan: Despite what certain self-proclaimed investment guru’s claim, funding for your retirement is not rocket-science. The single greatest factor preventing individuals from funding for retirement is not having a game plan. It’s a bit like the advice dispensed to Alice by the ever-wise Cheshire cat – if you don’t know where you going to then any road will do. Sit down with your financial planner, paint your retirement picture, put a financial plan in place to achieve those dreams and then revisit your plan every year to make sure you’re still on track.
- Making bad financial decisions: Once you’ve got a retirement plan in place, the key is having the strength of character to adhere to it – religiously. A significant contributor to the demise of many retirement plans is the interference of human emotion, specifically greed and fear. Learning to make investment decisions based on sound financial advice as opposed to using your emotions as a financial compass is an art. Find a financial planner that you trust implicitly and make sure you make all financial decisions together. (On this topic, you may want to look out for next week’s blog on how emotions can influence investor behaviour entitled “Clients behaving badly”.
- Under-estimating longevity: As a general rule in our business, we over-estimate longevity expectations rather than under-estimate them. Whilst it’s true that no one knows how long they’re going to live, there’s one thing we do know for sure – longevity is increasing and not decreasing – so let’s build in some extra funding to provide for the longevity trends. Many well-thought out and carefully adhered to financial plans have failed dismally for the single reason that the longevity assumptions were wrong.
- Retiring too early: Our entire working lives we’ve been brainwashed into accepting that we need to retire at age 65, and yet nothing could be further from the truth. Yes, it’s the legislated age in terms of pension funds and retirement annuities, but as individuals we need to seriously reassess whether this is truly the age we intend to cease generating an income. Whilst we may want to cease formal employment at this age, there is an abundance of ways to ensure that one can continue generating an income well after the age of 65. (Please look out for next week’s blog entitled “So you want to retyre”).
- Over-spending: Finally, overspending in ones retirement years is a common problem and results in many retirees being rudely awakened to a vastly diminished bank balance and many years of living still to fund. Having a documented financial plan will ensure that you know exactly how much you can spend in retirement, how much your living expenses are set to increase year-on-year and how long your remaining funds will last.
Whilst we’re passionate about lifestyle financial planning, we also believe most emphatically in taking the mystery and complexity out of investing so that it becomes accessible and understandable to all South Africans. There’s no doubt that many individuals have avoided undertaking the financial planning process through a genuine fear of the unknown and feelings of inadequacy when it comes to investing. The truth, however, is most succinctly summarised by investment guru, Warren Buffet, when he says: “To invest successfully over a lifetime doesn’t require a stratospheric IQ, unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”.
If you don’t have a retirement plan, put one in place today to ensure that you can retire like never before.
Have a blessed Easter weekend!