By Brad Toerien – FMI CEO
We all know that saving for retirement is essential, but do we know how much our clients need to retire? Our calculations are often based on the outdated assumption that individuals only need 75% of their income to maintain their desired standard of living and that savings equal to 20 times this amount is sufficient to provide an income for the rest of their lives post-retirement.
Is 75% really enough, considering that medical costs and inflation will rise dramatically and erode the value of income over time. For example, assuming medical inflation of only 3% above CPI, medical aid premiums as a percentage of income will more than double between the ages of 65 and 90. And what if your clients still have some debt or dependents to take care of?
Will 20 times their income really last their entire lives given that people are living longer than ever before and should be planning for life way beyond the age of 90?
For these reasons, our clients should to be saving more than conventional wisdom suggest. But, increasing inflation and the recent 1% hike in Value Added Tax (VAT) are just two factors placing increasing pressure on people just to make ends meet. So, in our current economic environment, how can your clients save more when they’re already cash-strapped?
One way is by relooking the way risk planning is approached. Risk planning can have a significant impact on investment planning and yet they’re seldom part of the same conversation.
At FMI, we believe that all risk planning should be designed to protect your client’s greatest asset – their ability to earn an income. Our philosophy is simple – protect 100% of your client’s income against Disability, Critical Illness and Death through appropriate income benefits. In addition to these income benefits, select lump sum benefits to provide for any additional expenses that come about from living with and adapting to a permanent disability, or additional medical expenses not paid for by medical aid in the event of a critical illness, or to settle debt and pay for estate duties in the event of their death.
This combination of income and lump sum benefits across all 3 risk events removes the risk inherent in managing a large sum of money and simplifies the advice process because it provides your clients with cover in the way that they think about their lives.
This approach will also save your clients a significant sum of money over time. Income benefits are almost always much cheaper than the equivalent lump sum amount and the gap actually increases over time. Investing these savings could radically alter your client’s retirement future. Take a 35 year old individual planning to retire at 65 as an example. These savings could increase the value of his/her retirement savings by nearly 20% – adding many additional years of income in retirement.
As an industry, we need to ensure that we are not still using yesterday’s assumptions to inform today’s financial planning. With a fresh approach to risk planning, we can make a significant difference to your client’s retirement future.