By Nic Horn, Director and Regional Head: Durban, Citadel.
Retirement is often painted as a harbinger of doom, with naysayers sounding endless warnings that you will likely need to cut out all of life’s pleasures if you’re to survive your retirement years.
But the reality is that with careful planning, retirement shouldn’t be an event that signifies any changes in your financial behaviour. All that changes is that you don’t go to work – everything else should be taken care of.
A rule of thumb states that if you can live on 5% of your assets each year and if they are managed properly, your savings should last you forever. Put differently, if you multiply your annual expenses by 20 times, you will roughly know what capital you need to retire comfortably.
However, recent studies suggest that just 8% of South Africans are saving enough to replace at least 75% of their final salary as their income in retirement – the goal-post for ensuring your financial security and comfort.
The most common themes underlying retirees’ lack of savings include saving too little, cashing in savings at resignation or retrenchment, investing too conservatively, and continuing to provide for children and parents.
But the biggest problem lies in the fact that, for many, the process of retirement planning does not begin early enough. In the era of instant messaging, Netflix, Uber Eats and mobile banking, we have come to expect instant gratification, with very little thought for the future.
Most concerningly, there are numerous fallacies about retirement savings floating around with the potential to cause irreparable harm to your investment outcomes, which urgently need to be addressed. These include:
- DIY-ing your investments will save you money
In investing, diversification is everything. You may have a rudimentary or even expert knowledge of the stock markets for instance, but you also need to consider other asset classes in order to manage your investment risk. The only guarantee investors have is that the future will surprise. And what will happen then?
Next consider that South Africa represents just 1% of the investment universe, and while companies such as Naspers have performed admirably, Naspers is not Amazon, Microsoft or Google – and that’s just equities. As an investor, you need to seek professional advice on managing currency risks and diversification across different regions if you are to optimise your portfolio.
Furthermore, it is next to impossible to be objective about your own money. Emotion is perhaps the single greatest danger in investing, and attempting to manage your investments completely alone increases this risk exponentially. Then there’s the problem of making the time to tweak your investment portfolio on an ongoing basis as markets and global conditions change.
Ultimately, financial freedom does not mean needing to do everything yourself. Fees do cause a drag on investments, but over the longer term you can’t afford not to pay for specialist advice. Seek out a good, trustworthy advisor to walk your financial journey with you.
- Longevity is your enemy
Longevity risk, or the risk that you will outlive your money, has become a source of increasing concern. But living longer also means that you should be able to stay healthier and work for longer.
Also consider that work as we know it is changing. Work is no longer a place – technology is a great enabler for working remotely or from home, so rather than giving up all employment, many people are moving into a soft retirement and consulting instead.
Rather than longevity per se, the greater risk now is becoming redundant or obsolete. In your forties and fifties you are generally at the top of your earnings potential, and thus at the peak of contributing to your retirement funds – making these some of the most important years for maximising your savings.
The base amount that you have built over the past few decades plus these heightened contributions and the power of compounding form a very powerful cocktail as you enter your pre-retirement phase, meaning that you could potentially triple the amount in your retirement fund.
Consequently, reskilling yourself is vital. Be prepared to continually learn and unlearn – the longer you are able to delay living off your assets the better.
- You need to avoid debt
It’s simply not realistic to expect people to avoid debt their entire lives. Everyone has had to deal with debt at some point in their lives, whether student loans, vehicle loans or mortgages. What’s more important is to distinguish between long-term and short-term debt.
If you are financing a long-term financial asset such as a house, this in fact represents an investment, as the value of your property should hopefully increase over time. Your greater concern when choosing to purchase a home should be managing your cash flow rather than the fact that you are taking on debt.
Be more wary of short-term debt, which holds the potential to exponentially inflate your expenses over time and eat away at your wealth. Before buying on budget, ask yourself why you are purchasing those items on credit. No one expects you to live like a pauper your entire life, but it’s worth considering whether you should instead delay spending until you have enough saved instead.
Manage your debt wisely, and use a budget planner if need be – the money that you save on interest repayments could substantially add to your wealth over time if invested instead.
However, when it comes to successfully managing your debt and cash flow, your best option is to partner with a professional financial advisor who can guide you along the financial planning process, help you to achieve your goals and ensure your financial security well into your golden years.