The Impossible Task of Pensions

The Impossible Task of Pensions

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Majority of people have chronically under-saved for retirement. This may be a result of not saving enough, starting to save too late, or using pension money to purchase cars or furniture instead of preserving the capital when resigning from employers. We need to save more for retirement or be prepared to work into our 70s.

Continuing your lifestyle

Let us take a look at an example to explain why pensions will not be enough to support our lifestyles in retirement.

Greg is 25 years old, earning R 8 000 a month and saves 15% of his income until he retires at age 65. Let us assume his investment grows at 10% per annum and his salary increases at inflation (assumed to be 6% over the long term).

Should Greg wish to receive a monthly after tax income of R 8 000 per month in today’s terms at retirement, his capital is likely to last until age 81. This does not seem too bad, but the major concern with this is that R 8 000 per month will probably not be sufficient for Greg as he would like to have a higher standard of living in retirement. If Greg wanted R 12 000 per month in retirement in today’s terms, his capital is only likely to last until age 73.

Focused on different channels

The above scenario is unfortunately something that will become more and more common in the future. People are living a lot longer and have saved nowhere near what they should have in order to support their lifestyle in retirement.

The above scenario also points out that you cannot solely rely on your pension fund for retirement income. We need to save more in our personal capacity to ensure that our money can support our lifestyle for a significant period of time.

To assist your capital to last longer, you could do the following:

  • Work beyond the ‘normal’ retirement date of age 65, perhaps working until age 70. This will not only allow your investments an extra 5 years of compound growth, but it will also reduce the amount of years in retirement you will need to draw from your investments.
  • Start saving MORE for retirement. Thereby having a larger investment portfolio to live off in retirement.
  • Cut out unnecessary expenses in retirement where possible Reduce your income needs in retirement as much as possible. The less income withdrawn from your investments, the longer your portfolio is likely to last.
  • Allocate more of your investments to growth assets (shares and property) during your accumulation phase, in order to achieve returns in excess of inflation. Ensure that you understand the risk or volatility that comes with this.

Andrew Padoa CFP ®

BCom Financial Management (UNISA)

Post Grad Diploma Financial Planning Law (UFS)

*** Consolidated is a national financial planning practice with offices inWestern Cape,Johannesburg,Tshwane,Eastern CapeandKwaZulu-Natal.  Andrew is based in KwaZulu Natal.

For more information please visit: www.consolidated.co.za

Andrew Padoa
Andrew Padoa works in the Private Client’s division at Consolidated Financial Planning. His area of expertise is investments, estate planning, retirement planning and portfolio benchmarking. He has had numerous articles published in the media on a number of topics related to personal financial management. Andrew is passionate about educating people and has given several financial literacy talks to both schools and corporates. His objective is to use his abilities and knowledge to help others achieve their financial goals. Visit www.consolidated.co.za for more information
  • Clive

    Hi Andrew, while I agree with the general premise of the article (i.e. that pension funds face an impossible task and people need to save more) your logic has an error in it. The higher standard of living in retirement that you use to justify Greg wanting R12k at retirement is only really realistic if Greg received higher than inflation salary increases (i.e. these higher living standard expectations normally coincide with those who have been receiving those same living standards during their working career – it’s not as though the average person suddenly gets to retirement and then decides he/she wants the finer things in life). In the case of the 12k retirement, the salary increases should be above inflation.