It is unfortunate that so few people realise that neither contribution to a retirement fund, nor to a private pension plan, necessarily guarantees sufficient funds on which to retire.
My advice is to calculate the numbers now, in order to establish where you are today and what your journey will be for the future. I’m often asked when you should start saving for retirement and my reply is always “the first day you start work.”
If you talk about retirement to a newly employed, young person they are quite likely to laugh at you. After all, your working life can be anything over 40 years and, when you’re 20 years of age, this is two lifetimes away!
The real problem exists when people don’t know how much to put away for retirement. I’ve written about the effects of inflation on spending, but the numbers are more shocking when you consider someone earning R30 000 per month today at, say, age 30 and at a 7% inflation rate, will need to be earning R228 000 per month at 60 years of age.
The main reasons why investors don’t have sufficient funds at retirement are:
1. Lack of preservation of retirement savings when changing jobs
Lack of preservation when changing your job is not negotiable because, if you opt to take the funds and start again, it will take years of additional contributions to make up for the lump sum you were paid out and, worse still, you will lose out on the eighth wonder of the world, namely the power of compound interest.
2. Inadequate contributions to a retirement fund
If you are a member of a company fund and you and your employer contribute equally, bear in mind that a portion of the contribution will go towards the cost of group life, disability and administration. This could be as much as 3% – 4% per annum.
Furthermore, your pensionable salary is often lower than your actual earnings because contributions may not be paid on commissions and/or bonuses received.
This is where retirement annuities play a major role because you can contribute up to 15% of non-funded retirement earnings which will be tax deductable. This means that if you are in an employer driven retirement fund, but you earn other monies which are not part of your pensionable salary, you can make use of this allowance.
3. Wrong investment strategy
Investors are often too conservative. For any period in excess of seven years, you should be fully invested in markets both locally and abroad although you need to be regulation 28 compliant. Although many funds have a voluntary default option which, upon nearing retirement, ensures funds are invested more conservatively, I’m not sure if you should automatically decide on this. My reasoning is simple. We live up to 25 years or longer in retirement and, therefore, when you come to retire you must look for some growth assets which will take inflation into account during the ensuing 10 – 15 years.
It’s back to the importance of understanding your financial plan. You need to assemble all the pieces of your puzzle to fully understand what your total funds will be at retirement. What is even more important is understanding what you’re invested in, understanding that if it’s income you need, you want certainty and security but, if time is on your side, you need growth.
Plan well in advance
Mature people will tell you that old age is not for sissies. Planning for retirement and understanding your journey is not for the financially disorganised. You don’t have to be a financial wizard but you do need to plan correctly. After all, when you go on holiday, it’s normal to plan your trip weeks in advance. The same principle applies to your lifetime financial journey. If you don’t plan properly while you have time on your side, and the earning capacity, don’t be surprised if it’s too late once you retire.