Playing Catch Up with your Retirement Savings

Playing Catch Up with your Retirement Savings


I regularly receive correspondence from would-be entrepreneurs, sharing their business ideas with me and asking how they should go about raising finance.

It’s never been easy for entrepreneurs to borrow money for their new ventures, but in recent times it’s become even more difficult.  There are few institutions which will lend money for start-up operations.

Entrepreneurs are a special breed of people who often risk everything to turn a dream into reality. When they leave their employment in order to begin their own business venture, they encash their investments, shares, unit trusts and any other savings, and surrender their endowment policies. In addition, any funds payable to them from their corporate retirement plans are also often used to start the business.

It is difficult to criticise the cashing in of investments, because many successful entrepreneurs will tell you that without these funds, they wouldn’t have been able to get their business venture off the ground. However, they need to be totally aware of the negative impact this could have at retirement, should the business prove to be less than successful.

Make up for lost time

Over the years I’ve been fortunate to have seen many small business ventures succeed. On the other hand, I have seen many fail – which brings to mind what my mentor said to me many years ago when I started in the industry. These are his words of wisdom: ‘Everyone hopes to create wealth during their lifetime’.

He then said that those who were fortunate and achieved this would not miss the small premiums they’d contributed towards their retirement. However, those who did not succeed would then need to rely on the money they had saved over the years, to finance their retirement.

If you have used your savings for a business venture, then it is advisable, once the new operation has reached a level of profitability, to begin saving aggressively to make up for lost time. Contributions to retirement and savings plans will not only need future monthly contributions, but could include a once-off single premium investment.

Loss of compound interest

In playing ‘catch-up’ with retirement savings, you cannot reasonably expect to determine when and how to retire if you haven’t assessed your future financial requirements. The starting point is to calculate how much income will be required, what your current assets are worth, and what your needs will be at retirement, using a 10% growth on current assets. Deduct this amount from the amount you need (there will be a shortfall), then calculate:

  • A basic amount you need to invest to make up the shortfall
  • A start-off amount with escalations to retirement to equal the shortfall.

The downside of depleting your savings and then trying to make it up in the following years, is that you lose out on what I’ve always considered to be the eighth wonder of the world, namely compound interest. I believe in the concept of diversification outside of your business, whether it be other investments, or something a little more structured by way of saving for retirement.

Take steps to catch up

  • If you are unable to ‘catch up’ or time is running out, there are three options:
  • Continue working past retirement age — it doesn’t have to be a 40 hour, five day week, but can be cut down to a few hours a day, or a few days a week, obviously with a reduction in income.
  • Lower your expectations for retirement years by moderating your anticipated lifestyle. This could mean you need to curtail possibly visiting family overseas. Perhaps even consider moving to a smaller home.
  • Find other means to generate cash such as working part-time or, perhaps, consulting in your areas of expertise.

Your enemies in retirement are going to be inflation and taxation. You have to take all this into account when playing catch-up.  This will determine your investment strategy and allocation to the different asset classes.

Bryan Hirsch
BRYAN HIRSCH has been in the financial services industry for 47 years and is a director of Bryan Hirsch Colley & Associates. He has written two books, the first Bryan Hirsch’s Guide to Personal Finance and more recently, Steps to Financial Freedom. Bryan has written for many of South Africa’s top financial and business publications, has been a weekly guest on Radio SAFM for 18 years, and has his own weekly TV show You & Your Money on Summit TV.