You realise you don't have enough for retirement, now what?
By Tim Rogers
Retirement is the one risk most people forget to take into account – and yet the likelihood of it materialising is way higher than the dread diseases or car accidents we typically worry about.
Chances are, you will reach retirement age and therefore you need to be sure you have enough money to make it a pleasant experience.
First things first. Do you, in fact, have enough to retire on – do you need to worry? There are rules of thumb that can give you a rough idea. One is that you can safely draw down 4% of your capital, so for every R3 333 per month you need to live on, you need R1 million of capital. Need R50 000 a month? Then you need R15 million to fund it today.
This kind of calculation is useful as a beginning, but there’s more to it than that. The age at which you retire and what your life expectancy is are important variables, as is your health. In addition, while your expenses may remain high for the first few years of retirement, they may go down after a few years as you slow down and do less, for example. Expenses can also increase dramatically due to medical costs; everyone is in a unique position and it is never one rule fits all.
Another question: do you want leave capital behind for a spouse or relative to inherit? If not, you could draw down at a higher rate and still be safe.
Your first step is therefore to look at what you currently spend and then spend time working out what you would like to spend for an ideal retirement. Everything hangs off this exercise.
If you and your financial advisor then conclude that, in fact, you don’t have enough money to retire securely, the conversation gets rather more difficult.
An important point is that the earlier you have this conversation, the less painful the remedies will be. If you’re in your thirties, say, the necessary adjustments will be relatively minor, but if you’re in your fifties then drastic action will be needed.
There are basically four things you can do:
- Save more money each month – obviously, the younger you are, the less extra you would need.
- Look at the risk profile of your investment portfolio. By accepting higher risk, you can lock in higher upside potential, but such investments are more volatile – get ready for a bumpier ride. However, bear in mind that “safe” investments like cash carry a high risk from inflation, and would typically decrease in value in real terms. Again, the closer to retirement you are, the less risk you can take on.
- Retire later. By continuing to work for a few more years, you can harness the power of compound growth. Thanks to modern health care, many people find that they want to go on working and earning beyond 60 or 65.
- Reduce the amount needed for retirement. You could look for ways to cut your retirement budget and thus the capital needed to fund it. Do you need an annual overseas trip or would one every three years be OK?
Making the right choices will be hard because of all the variables. A good financial advisor will help you navigate this complexity, but technology can be a huge help. I am thinking here of a tool that will help you to visualise the impact of every option.
For example, if I save an extra 5 percent per month, what does that look like? Or if I reduce my desired retirement income by R10 000, what does that look like?
Tim Rogers, Wealth Manager, GCI Wealth