I fear the average South African is facing a ticking time bomb iro underfunded retirement as we continue to kick the proverbial can down the road until we are forced to deal with the reality of the situation and then we look for silver bullet solutions and / or someone to blame.
Retirement planning for most seems to begin a year or two before retirement. If we are fortunate enough to have belonged to an employer retirement fund, we start enquiring about the projected pension or lumpsum to be paid. Self-employed people start tallying-up all the policies the assurance man sold them through the years and are usually bitterly disappointed with the sum they come up with and quick to trash the assurance company for dismal returns.
The prospective retiree then approaches a retirement specialist for advice who is then expected to deliver a miracle. In the old days there was no option but to accept what the assurance company was offering iro a life-long guaranteed pension, which you had to live within. Nowadays the majority pensions purchased at retirement are what we call Living Annuity’s. In the UK these pensions are more appropriately named drawdown annuities, which better describes what they are. You have a pot of money and you are permitted to draw what you need or rather what you want!
The pitfall is obvious. Retirees not wanting or able to reduce living costs start drawing an unsustainable income from their pension pots and run out of money. As investment advisers we spend an inordinate amount of time and worry on trying to maximise returns within appropriate risk budgets to meet unrealistic objectives. It is as simple as clients cannot live on less and the pot of money cannot provide for what they want for the rest of their lives. There is simply not enough and this will end in tears.
Retirement planning should start the day you get your first paycheque and is simple as following the numbers 5-15-25. Save 15% of your working income from day 1; draw 5% pension at retirement, sustainable for 25 years.
On a lighter note; if you forgo your daily coffee from your favourite barista and instead invest R30 p/day for 40 years, you will accumulate circa. R5.9 mil at retirement, which is sadly more than the most retirees have at retirement! Go figure…….
Mcomm, CFP®, HdipTax
T. 021-851 3746