They say the best time to start planning for retirement is when you start working, the next best time is now.
I spend my days talking to people of all ages about retirement. I talk to men and women, some of them are comfortably off, many of them are struggling to make ends meet. My many conversations with people in a wide variety of socio-economic situations has lead me to conclude one thing for certain: Everyone needs to plan for retirement, not so much because they need a retirement plan, but because they need to go through the planning process.
It is the process that will set you up for a successful retirement. The plan itself is often just wishful thinking about how your life will pan out. As John Lennon famously pointed out, "Life is what happens while you are busy making other plans".
One moment your retirement pot is overflowing, the next it is half empty and your former spouse is driving off in a brand new Mercedes. No retirement plan ever builds in those kinds of twists (or that level of short-sightedness). So you might not even bother to print out your plan, but please do go through the planning process.
1. It will demystify the topic and remove the ‘fear factor’. There is an army of financial advisers and brokers out there who make a living off your fear of matters financial, and off your savings. Confront your fear by doing your retirement plan, and you won’t have to be one of them. You will save yourself hundreds of thousands of rand.
2. It will help you grasp the body of knowledge. It is easy to feel overwhelmed by the sheer volume of information, options and opinions on the topic. But once you confront the required body of knowledge, and realise how small and simple it all is, you will easily separate the industry’s marketing chaff from the stuff you actually need to know. Financial independence in retirement is a realistic, achievable goal once you acquire a few healthy saving and investment habits.
3. It will set you in motion. The planning process is the ‘unbalanced force’ that will inspire you to get your savings affairs in order – either by starting your own plan, or by taking a critical look at your current arrangements and contribution rate.
4. It will force you to set a goal. To achieve a secure retirement, you need to define a secure retirement. Planning for retirement will force you to apply your mind to this topic: how much do I need, to enjoy a comfortable retirement? It is possible to put a value on this number, despite the many unknown variables, such as your retirement age, your lifestyle at that time, future inflation and market returns, and your life span. Financial planning tools such as the 10X Retirement Calculator can help you quantify your goal.
5. It will motivate you. Once you know your goal, saving for retirement will cease to be a Sisyphean task – the pursuit of a goal that is forever out of reach and therefore pointless. Now there is a finish line. And once you can see that, and how each step brings you closer, then seemingly insignificant actions – such as paying your monthly contribution or steadily raising your contribution rate – become meaningful. Goals are so much easier to achieve once you break them down into small, manageable steps.
6. It will dispel illusions. Depending on your age, gender, marital status and expected retirement date, you will have to save anywhere between 15 percent and 30 percent of your monthly salary, to get to your goal. You may not be able to afford the required rate, but it will rid you of the notion that saving 5 percent or 10 percent of your salary will set you up for a comfortable retirement.
7. It will cure you of your stock market phobia. Planning will educate you about the return you must earn on your contributions to make your retirement equation balance. And on the return you can expect to earn from different asset classes over the long term. Once you learn how different asset classes perform and behave over the long-term, you will no longer have reason to fear short-term share price volatility.
8. It will open your eyes on fees. The planning process will alert you that small changes to your expected return have a big impact on your long-term savings outcome. You will become wise to the long-term impact of high fees, a too conservative portfolio mix, or an underperforming active manager.
9. It will convince you to preserve your retirement savings when you change jobs. Cashing in your retirement fund means that you must start from scratch, but with a lot less time for you to reach your end goal. Once you understand how much you then need to save to still balance your equation, or how much less retirement income you will have to make do with, you won’t have the stomach to spend this money on a flashy new car.
10. It will bring you peace of mind. If you don’t worry about your retirement early on, you will worry about it for the rest of your life. It’s a terrible trade-off. Address the problem when you are young(ish) and you will spare yourself many sleepless nights later on.
Simply by going through the financial planning process, you will become a more informed investor, able to make competent financial decisions on your own. You will be in control of the process and the outcome. You will be able to anticipate your retirement with confidence, so much that every now and again you will get the urge to shake hands with your younger self and say: “Thank you!”
Your alternative is to do nothing and hope for the best. But as Benjamin Franklin observed, “He who lives on hope will die fasting.” In this case, you can take that literally or metaphorically.
Brett Mackay is an Investment Consultant at 10X Investments