Retirement funding: How to catch up when you’ve fallen behind

If you’re behind in your retirement savings, the thought of trying to catch up – especially as you near retirement age – may appear overwhelming and seemingly impossible. Most retirement advice reiterates that, in order to achieve a comfortable retirement, you need to start saving with your first pay cheque and remain invested, uninterrupted, until your desired retirement age. However, not everyone’s investment journey follows this simple savings trajectory. In fact, most people’s investment journeys are a series of stops and starts interjected by life events such as retrenchment, divorce, setting up a new business, expensive medical emergencies, and even global pandemics.  If, for whatever reason, you’ve fallen behind in your retirement savings, there are some concrete steps you can take to catch-up.

Consider retiring later

Give careful thought to the age at which you intend retiring, and consider the option of delaying retirement for a couple of years. Your retirement marks an important transition from accumulating wealth to drawing down from your wealth. As soon as you retire and stop generating an income, you will need to start drawing from your invested capital to cover your monthly living expenses. Delaying retirement will not only reduce the number of years you will need to draw from your capital, but will also extend your investment horizon – allowing you to both contribute more towards your savings and to reap the benefits of additional compounding.

Cut back discretionary expenditure

Be ruthless with your discretionary expenditure and find ways to cut back any costs that could otherwise be channelled towards your retirement funding. Where line items have held space in your budget for some time, it’s easy to overlook them as essential expenses, so be intentional about looking at your budget with a fresh set of eyes. Pay close attention to bank charges and transaction fees, unnecessary subscriptions that are running off your account and which you no longer make full use of, convenience food and drinks, entertainment and eating out, gym fees, and impulse purchases.

Pay off your high interest debt

If you’re servicing high interest debt such as credit card and retail debt, prioritise paying this debt off as quickly as possible. Creating wealth while you are paying off high interest debt is difficult to achieve because the high cost of interest generally depletes any gains made on the other side, so prioritise settling your debt and then putting an accelerated wealth creation strategy in place. The longer it takes you to pay off your debt, the more you’ll end up paying in interest – to the detriment of your retirement savings. If compound interest isn’t working for you, it’s working against you – so implement a realistic debt reduction strategy and get compound interest on your side.

Trim back on life cover

If you have life, disability and/or dread disease cover in place, get your financial advisor to review your insurance needs with a view to potentially trimming back excess cover. Remember, as you accumulate wealth so your need for risk cover may reduce and, if you haven’t done a comprehensive review of your long-term insurance needs for a while, you may find yourself over-insured and able to cut back on some premiums. For instance, if you took out bond cover when purchasing your home, you may be able to now reduce that cover in line with the amount outstanding on your bond.

Generate additional income

The development of the ‘gig economy’ has given rise to a number of innovative ways to generate additional income with very little in the way of start-up costs. Dog-walking, house-sitting, child-minding, and tutoring are excellent ways to generate additional income, with a number of online portals available to register your services and generate leads. If you have unutilised accommodation, you may also consider renting out space or a garden flat to generate some additional income.

Start saving more

Any money saved by reducing debt, cutting back expenditure, trimming back life cover, or generating additional income can be channelled towards boosting your retirement savings, but it is important to be deliberate about doing this and not to let ‘lifestyle creep’ rob you of your hard-earned additional cashflow. Stick to your slashed budget and seek advice on the most tax-efficient manner to invest your surplus cash, while ensuring that you achieve a workable balance between making use the tax-efficiency offered by compulsory retirement funds and ensuring that you have enough money housed in a discretionary investment to provide for cashflow and/or large capital outlays in the future.

Automate contributions

Automating your monthly savings is the best way to ensure that you remain committed to your investment strategy. Depending on the nature and frequency of your earnings, commit to a monthly contribution towards your retirement annuity with the balance being paid annually in the form of an ad hoc contribution calculated to achieve the greatest tax benefit. Set a monthly debit order in an amount you feel comfortable you can commit to going forward, and if you do have any monthly surplus income, park it in your access bond or money market account until the end of the tax-year when you can make strategic decisions regarding the allocation of any surplus investable money.

Invest more aggressively

Delaying your planned retirement by even five years will affect your investment horizon, your draw down timeline, and subsequently the level of risk you are able to take in your investment strategy. If you’re working towards a delayed retirement, ensure that your investment strategy and asset allocation are aligned with your extended timeline to ensure that your funds are exposed to the appropriate level of investment risk. Inflationary risk, which is the risk that your capital will lose value in real terms over time, needs to be mitigated to ensure that your investment returns allow your capital to outstrip inflation and increase your wealth in real terms.

Look after your health

Delaying your retirement means that taking care of your health must be a priority. As such, reducing your medical aid and/or gap cover may be counterintuitive to your plans to work longer. Do a full assessment of your healthcare needs and don’t cut corners with your medical aid or gap cover. In the event of a hospitalisation or chronic illness, any amount not covered by your medical aid and gap cover benefits will come directly from your retirement savings. Remember, your medical costs are likely to increase as you age, so be realistic about your medical needs and make your medical aid and gap cover a priority in your budget.

Develop a retirement plan

For absolute peace of mind, get an independent advisor to prepare a comprehensive retirement plan for you so that you can have mathematical comfort that your goals are realistic and attainable. Stashing away as much as possible and hoping for the best is not an investment strategy. An experienced advisor will be able to develop a number of retirement funding scenarios for you using a realistic set of assumptions so that you know exactly what you need to do to achieve your objectives.

If you know you are behind in your retirement savings, the worst thing you can do is nothing. The best thing you can do is take steps today to start catching up. The good news is that you have options.

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