Younger South Africans who spent time with retirees as part of the Glacier by Sanlam #FutureFWD campaign have contemplated the effects of inflation on the cost of living in retirement.
In the project, Thoban Jappie, 42, a social media businessman, was paired with retired doctor Tommy Blake, 65, Bailey Schneider, 32, a radio and television presenter, with Sarah Ravenhill, 56, who formerly ran her own tourism business, and Candice Bresler, 29, a public relations executive, with former restaurateur, Michael Olivier, 69.
On a shopping trip with Blake and his wife Sakina, Sakina told Jappie that when she started buying ostrich steak 20 years ago, it cost R6.99 a kilogram. It now costs over R60 a kilogram.
“This exercise made me starkly aware of the cost of living and the impact of rising inflation. My immediate thoughts are: what will the cost of food be in my retirement, and will I have saved enough to sustain my standard of living?” Jappie writes in an Instagram post.
Inflation is an important factor to consider when you plan your retirement, but you need to focus less on how many times the cost of your grocery basket will increase over your working life, and more on how your savings match your retirement needs and grow at an inflation-beating return.
The earlier you start to save, the better your chances are of your savings meeting your retirement needs.
As you save for retirement, your aim should be to save enough to generate a decent income
, and you will typically achieve this by targeting a certain income replacement ratio, which is your pension as a percentage of your final salary.
Employer-sponsored retirement funds aim for target income replacement ratios of between 60 and 80 percent if you save for between 30 and 40 years. But there are problems with these targets, and self-employed people need to create their own targets. For these reasons, you should regularly check that what you are saving (your contributions) and the growth on your savings are on track to deliver your income needs in retirement.
Here are the things you, or your financial adviser, should regularly check and consider:
* What percentage of your income you will need to live on in retirement. Give some thought to:
- What you want to do in retirement (see “Retirement can be fun” below);
- Your potential medical needs;
- Who you will be supporting. The younger #FutureFWD participants discovered that retirees often support dependants – Ravenhill supports a sister with Down’s syndrome and Blake supports his 95-year-old mother.
* How your retirement income will increase. Considering how long you may live, especially with increasing longevity, your income must at least keep up with inflation. Providing for an income that increases with inflation will require more savings than providing for a level income. The inflation you experience in retirement will differ from that which you experience as a working South African (see below).
* What you will accumulate at your current savings rate. Check that your savings returns are beating inflation by a sufficient margin.
* The income your savings will provide at retirement. If you are not on track, there are only three things you can do to improve matters:
- Save more;
- Save for longer (delay your retirement); or
- Take more risk by exposing your savings to a higher level of growth assets, such as listed equities. But bear in mind your own tolerance for risk, the prudential guidelines in the Pension Funds Act for retirement savings (Regulation 28) and the fact that exposure to higher-risk assets is a long-term strategy and may work against you in the short term.
RETIREMENT INFLATION
The inflation you are exposed to in retirement may differ from that in your working life. According to Glacier, the reasons are:
* The older you are, the more comprehensive your medical cover needs to be. Comprehensive cover costs more, will consume a larger portion of your budget and will increase each year at a higher rate than inflation – on average, four percentage points above inflation.
* You may be less affected by transportation costs, as you are unlikely to commute as much as someone who is working.
* You may be less affected by the prices of electronic goods, take-away foods and other luxuries, as pensioners typically spend less on these goods.
* You should ideally have paid off your home loan and vehicle and other asset finance, which means you shouldn’t be exposed to changes in lending rates.
* As a pensioner, you will most likely spend a larger portion of your budget on electricity – and be affected by increases in energy costs.
RETIREMENT CAN BE FUN
Don’t put your head in the sand and refuse to think about retirement because you view it as a sad time of life for old people. This is a key lesson the three younger participants in Glacier by Sanlam’s #FutureFWD campaign have learnt.
In fact, they have realised that planning for retirement can ensure you have enough money to make retirement the time you do all the things you never had time to do when you were working.
“Chatting to Michael [Olivier] – and seeing how busy his diary is – has changed my idea of retirement. It’s not just staring out of the window or polishing golf clubs. I can well believe that Michael is busier now than he was while he was ‘working’,” Candice Bresler says. “Michael’s wine collection has inspired me. When I’m 69 I would love to have a good few hundred bottles stored at home. He kindly showed me some bottles from 2011 – the year he retired. I wonder which vintage I’ll retire in!”
Thoban Jappie and Thomas Blake attended Blake’s church, art classes and Grandparents’ Day at Blake’s grandson’s school during their time together.
“Tommy is amazing! He’s very active – working within his church community, as an online doctor dispensing medical advice, and he’s very involved with his family and grandkids, plus doing things around the house. He’s made me realise that retirement is the start of a great period of your life, where you’ll be able to do things on your terms,” Jappie says.
After witnessing Sarah Ravenhill’s active life, and sharing a paragliding experience together, Bailey Schneider comments: “Sarah has absolutely opened my eyes to a world after work. I’m so career focused, but I’m also looking forward to that chapter … I’ll only be able to look forward to it if I plan financially. I’ve stopped spending frivolously and now, more than ever, I want to invest wisely and really save properly. I’ve also looked at my health from a fresh perspective. For so long it was about losing weight … but now it’s about being healthy and fit so that I can hopefully do all the things I want to as I get older.”
ADVICE RETIREES WOULD HAVE GIVEN THEIR YOUNGER SELVES
* Tommy Blake: Devote more time to the things that really matter – family and personal well-being.
* Michael Olivier: Save more and, as Candice Bresler puts it, “cut down on frills”.
* Sarah Ravenhill: Most of the challenges I encountered came from inadequate financial and investment knowledge. Meet with a financial planner who is not out to make a quick buck. Learn about how retirement funding is based on financial calculations. Learn about inflation. Make sure you have good medical cover and that you can afford the increases.
LESSONS LEARNED FROM #FutureFWD
Candice Bresler says she has realised her current spending habits and financial health need a rethink: “I tend to sometimes live outside my means in order to maintain the lifestyle I enjoy.”
She realises she needs to divert money to saving for retirement: “Not only will my retirement be more expensive, but it will possibly last for a decade longer than previous generations.”
Thoban Jappie has also realised he needs to reassess his spending, as Tommy Blake has always led a frugal lifestyle, which now enables him to live comfortably in retirement without cutting back. “In comparison, my treats seem rather extravagant. Last year I bought myself an old motorbike, and this year a new camera,” Jappie says.
Summing up the lessons he has learned, he says he has two key take-home messages: “Start exercising – good health is the best investment! And I’ve just started actually putting a fixed amount aside to contribute towards my retirement, in an account that will remain untouched.”
Bailey Schneider admits #FutureFWD forced her to think about retirement for the first time. “I’m definitely not being an ostrich anymore and sticking my head in the sand. I have set up a proper savings account that earns better interest. I am looking into retirement annuities and I’d really love to invest in property. I feel proud of myself for being adult about my finances – it’s a great sense of achievement and accomplishment. I’ve also upped my exercise regime. I’m looking at exercise in a whole new light now. I want to be fit and healthy forever ... not just when I’m young.
“I’m really excited for retirement,” she says, adding that she will “spend time with my husband, future children and even grandchildren, as well as find time to travel or take up hobbies.”
* Go to www.glacier.co.za/personal/retirement for more on the #FutureFWD campaign and for links to the participants’ blog sites.
About Glacier
Glacier by Sanlam provides financial solutions to the affluent market, in partnership with financial intermediaries. Endorsed by Sanlam, the company offers a wide range of financial solutions, designed to assist clients to create and preserve their wealth throughout their lifetime. These solutions include local and international investments, stockbroking, as well as comprehensive short-term insurance and risk cover for both personal and business assurance. For retirement, Glacier provides solutions to save for retirement, to preserve retirement benefits and to provide a retirement income. For more information, please visit www.glacier.co.za or contact your financial adviser.