Millions of South Africans face a future of working well past their retirement age in order to shore up finances. Inadequate financial planning means many face running huge shortfalls on what they would actually need, in order to retire content.
It is estimated that far less than 10 percent of South Africans will be able to retire comfortably and some may have to delay their retirement plans because of the recession.
Not giving enough consideration to planning for retirement means people may be forced to continue working for much longer than they had originally expected. Putting off a retirement savings plan, even for just a few years, can have a seriously detrimental effect on your final income at retirement.
We aim to dispel some of the myths currently surrounding retirement saving:
Myth 1: My company pension scheme will be enough.
Reality: Company pension schemes used to be seen as the only savings vehicle necessary for retirement. Nowadays, however, most pension schemes will end up paying out a much smaller percentage of your final salary. A company pension is a solid savings vehicle. However, if you wish to maintain your lifestyle into retirement, then you need to consider other assets too.
Myth 2: My expenses will drop after I retire.
Reality: It is true that in retirement certain expenses will decline or even stop altogether. You no longer need to drive to work every day or pay into a retirement fund and hopefully your bond will be paid off. Nonetheless, other expenses, such as health care, are likely to cost you far more in this period than at any other time in your life. While you may have a medical scheme, there are likely to be additional health care expenses that you will need to meet.
Myth 3: My house can help to finance my retirement.
Reality: Using rental income from a second home to supplement your retirement can be a good idea. A common trap many people fall into, however, is to look at their home as a savings vehicle. When you see your house appreciating from its original purchase price, it is easy to feel cash-rich and to assume that this extra equity will help to fund your retirement plans.
Equity released from your home can provide a lump sum, but you will still need somewhere to live afterwards and rent can quickly deplete savings. The other option is to release equity by downsizing or moving to a cheaper area. However, while your younger self may be willing to do this, you may need to reflect on whether you’ll feel the same upon reaching retirement.
Myth 4: I can’t afford to get proper financial advice.
Reality: Some people make the mistake of thinking that financial advice is a costly affair and is therefore only the reserve of the wealthy. The financial services industry is a maze of products and information, and determining the right one for you without any proper advice is a hard task. For anyone who wishes to retire comfortably, it is important to undertake a financial needs analysis. This will help identify how much money you need to retire comfortably, whether you are on track with your retirement plans and, if not, how to achieve these.
Myth 5: I need to fund my children’s tuition first.
Reality: It is critical to save for your children’s education, but not at the expense of your retirement funding. Avoiding saving for retirement in order to fund your children’s tuition at university may be a noble cause but it’s an absolute no-go unless your children support you in your old age. The key is to start investing early for both, which will alleviate the pressure later. Down the line, if there is no savings for their education, they will still be able to access student loans and grants if they have to, but there will be no such financial help for you when you retire. If money is tight, encourage them to attend a local university and remain living at home, but don’t stop saving for your own retirement.
Myth 6: I’m too young to think about retirement.
Reality: Most young people make the mistake of thinking that retirement is so far in the future that they can put off thinking about saving for retirement until later in life. The reality, however, is that delaying your contributions even for just a few years can have a huge impact on your final retirement fund. For example, a 25-year old man saving R1 000 a month, with an investment return of 12 percent, will have a retirement pot of R5.96 million at the age of 55. If this man delays his saving by just five years, his retirement pot at 55 will be worth half that amount, at just R3.07 million.
Myth 7: I’m too old to start saving now.
Reality: One common piece of advice about saving for retirement is to start as early as you can. However, if you’ve left it late and are only now beginning to think about what you will live on when you retire, don’t stick your head in the sand. It is better to save late than to not save at all. Put away as much of your salary as you comfortably can – a few years seriously dedicated to saving can make a massive difference in your final pension pot.
• Tandisizwe Mahlutshana is executive of marketing at PPS Investments.