This article was initially published in the 2nd-quarter 2019 edition of Personal Finance magazine.
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 you can live on five percent of your assets a year, if they are managed properly. Put differently, if you multiply your annual expenses by 20, you will roughly know what capital you need to retire comfortably.
Recent studies suggest that just eight percent of South Africans are saving enough to replace at least 75 percent 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 having 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. Concerningly, there are numerous fallacies floating around about retirement savings that have the potential to cause irreparable harm to your investment outcomes. They include:
1. DIY-ing your investments will save you money
In investing, diversification is everything. You may have expert knowledge of the stock markets, for instance, but you also need to consider other asset classes in order to manage investment risk. The only guarantee investors have is that the future will surprise.
Next, consider that South Africa represents just one percent 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. You need 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 alone increases this risk exponentially.
Then there’s the problem of making the time to tweak your investment portfolio as markets and global conditions change.
Advice fees do cause a drag on investments, but over the longer term you can’t afford not to pay for specialist advice.
2. 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 build over earlier 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.
3. You need to avoid debt
Everyone has had to deal with debt at some point, whether it’s 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 asset such as a house, this represents an investment, as the value of your property should increase over time. Your greater concern when buying 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 credit, ask yourself why you are doing so. No one expects you to live like a pauper, but it’s worth considering delaying spending until you have saved enough.
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.
When it comes to successfully managing your debt and cash flow, a professional financial adviser can help you to achieve your goals and ensure your financial security well into your golden years.
Nic Horn is director and regional head: Durban, Citadel.