When I was in my early twenties, I thought I would be dead by the time I was 50. This is not because I was ill or living dangerously, but it simply seemed so far away. My parents, who were in their forties, seemed so old. So, here I am, in my fifties, wishing I could slap my twenty-year-old self.
In my 13 years as a financial adviser I have met so many people who have left their retirement planning too late. It's not like they didn't have the opportunity to save because most were on a company retirement benefit scheme for a large part of their working lives. So where did they go wrong? And then, how do you fix it before it really is too late?
Less than 30% of employed people in their forties know how much they will need to live comfortably when they retire.
Research shows that the average retiree needs approximately R21,000 after tax to afford to live in a middle of the range retirement village. This amount includes rent, levies, three meals a day, a hospital plan and 24-hour frail care nursing. This does not include any other expenses such as telephone, entertainment, holidays and other extras.
The latest findings by Member Watch™ states that a forty-year-old person should have approximately 3.2 times their annual salary saved for retirement at this stage in order to retire at 75% of their final salary.
Their research also tells us that over 50% of retirement fund members will retire on 20% or less of their final salaries at retirement, which means a considerably lower monthly income after they stop working.
To provide an income of R 25 000 per month before tax for 30 years you will need approximately R 5.8 million in today's value. The assumptions are that inflation remains at 6%, the investment growth rate is 10% net of unit trust fees and the income draw down is approximately 5.2%. On the basis of this calculation the capital will be largely depleted at age 95. This also assumes that you're no longer paying off a house or car and are not supporting children, etc.
It is never too early to start planning for the rest of your life. If you feel that you have left it too late, it becomes even more important to start doing something sooner rather than later by:
- Saving more;
- Adjusting your lifestyle;
- Taking on the appropriate risk in your investment portfolio;
- Working for longer (ie. past the usual retirement age).
Younger clients often tell me they cannot save more than their company fund contributions. When we go through their budgets and separate the needs from the wants, it becomes clear that there is capacity to save. By removing or cutting down on luxuries such as pay-for television, eating out, take-away meals, entertainment, smoking, shoes, handbags, etc., there is a lot of fat in the budget. For example, quitting smoking can save about R 1,200 per month if you smoke a packet of cigarettes a day at R 40 a packet; that's approximately R 14,600 a year.
The old saying by Warren Buffet, “Pay yourself first.” Is a very important lesson. Saving for your retirement should be treated like another bill you have to pay, not something you do at the end of the month, if you have left over cash.
Preserve your pension or provident fund when you leave your company. Taking this money to pay off your car or other debts is one of the biggest financial mistakes members make. If you think about it, where will that car be by the time you retire? How much will it be worth? Was it worth sacrificing your retirement savings for improved short-term cashflow?
Live within your means. Save before you start spending. Buy a house or car you can easily afford not what you can only just afford.
ADJUST YOUR LIFESTYLE
Nobody likes to hear it, but the fastest way to save more is to spend less. Trimming your lifestyle to one that costs a little less will allow you to save more.
Before you can start saving you have to find out where your money is going. By drawing up a budget of my monthly expenses I found that I was spending money on the top of the range DStv package, iTunes subscription (for what I do not know), private security, and my cell phone contract was never renewed, but I was still paying the same amount. This means I was still paying for the hardware which should have been paid off after two years. I called my cell phone provider and renegotiated my package. The saving was about R 550 per month. I renegotiated my monthly private security costs as I found out that a new client will pay approximately R 250 a month less than I do. My premiums kept going up because I have been a loyal client for over 20 years. I was also paying for stock market research I was not using. I exchanged my DStv for Netflix and cancelled the iTunes subscription. In total I cut out R 2,645 per month just from the budget items mentioned here. That is R 31,740 a year.
If you know that you will have to cut back on your costs during retirement, you should ideally start cutting back before that time. Adjust your lifestyle while you are still working and accumulate your savings. Add to your retirement savings as you go. You will be amazed how it adds up.
TAKE ON THE APPROPRIATE RISK IN YOUR INVESTMENT PORTFOLIO
As an investor, you should have completed a risk profile questionnaire at some stage. The questionnaire asks about your age, when you plan to retire, what you would like your investment to do: provide an income, preserve capital, maximum capital growth, etc., how much volatility you are prepared to take should the value of your investment drop in the short term and what you think your risk profile is: low risk, medium or high risk. Often clients want maximum growth with no market volatility.
The risk profile gives us financial planners a guideline on how you feel about investing and the risks that go with it, so we can curate a solution that best fits your comfort zone with the best possible returns.
Fear and greed are the biggest detractors from wealth. Fear keeps you safe and investing in low risk investments such as cash. The interest earned on cash, generally, will not keep up with inflation, so you erode the buying power of your investment over time. Greed, on the other hand, sees investors jumping into the next best thing at the highest price because this is what everyone is talking about.
Your ideal plan is one which looks at your current situation and future ambitions and how you are going to fill the gap between them. Consistent returns over time need to ensure that your investment keeps pace with inflation at a minimum. To provide for your needs, you may require an inflation plus 2, 3, 4 or more return. The higher the return you require, the higher the equity allocation in your portfolio. This is where your comfort level is tested. Once I have established your goals and put your investment into place, I leave the portfolio management to the expert asset managers. From then on, I manage my clients' behaviour around their investments, reminding them why they are doing this and realigning their portfolio strategy with their changing needs.
For many people working longer at their current employer is not an option. If you have crunched the numbers and found that you will have to supplement your retirement income, it's better to get that side business you have always dreamt of up and running.
They say it takes a thousand days to start reaping the rewards of a new business. That is about three years. Learn a new skill, go on a small business course, find out what your community needs and get going. A little idea can turn into a great business. Who knows, maybe you decide to give up the corporate life long before the company gives up on you.
This might seem like a lot to do, but a small change here, cutting back there and a new opportunity could change everything.
The secret is to start by having a very frank discussion with your financial adviser.
Connect via LinkedIn or contact me at NFB Private Wealth Management Johannesburg