Beat the statistics and retire (and live) the way you really want to

There is both good and bad news for South Africans when it comes to retirement.
The bad news? You probably aren’t adequately prepared to retire comfortably and with dignity at the moment.
The good news? You can do something about it!
The catch? You should start doing something about it sooner than later.

Business Tech recently asked nearly 3 000 respondents about their saving habits. Most of the respondents said they were saving less than 10% of their salaries, with only 23% saving more than 20% of their salary for retirement.

Although we understand that many South Africans simply aren’t earning enough to save, the Business Tech survey targeted middle-class South Africans that should be earning enough to save something… in theory.

The sad reality is that too many South Africans will have to downgrade their lifestyle when they stop earning an income (if they can even retire). As a specialised retirement services platform, mCubed Group wanted to compile this article containing our top tips to help you avoid this situation.

We don’t know of one person who doesn’t want to retire comfortably or who wants to keep working because they are forced to. In fact, we’ve found that it is one of the most common long-term financial planning wants. We say ‘wants’ because research shows that 71% of South Africans have no retirement savings plan at all. And only 7% of those who are saving believe they will retire comfortably!

Unfortunately, most investors only realise they won’t have enough for retirement when there isn’t enough time to do anything about it. One of the main reasons this happens is because people don’t understand how much money they will need when they retire.

How much money you need to retire with dignity in South Africa

Many personal finance experts say you should be able to replace at least 75% of your current (pre-tax) income to maintain your living standard at retirement. However, we suggest that it should be closer to 80%. This equates to saving between 12% to 17% of our income from day one of starting work.

For example, if you currently earn R15 000 per month, you will need at least R12 000 per month to retire using the same living standard as you have now.

A recent retirement industry survey found that the average South African will only be able to replace 31% of their income with their current retirement savings. Using the same income example as above, instead of R12 000 per month, you will only have R4 650 per month. Sadly, this means one of two things if we don’t increase our retirement savings through investment:

  1. We will likely have to live on less than a third of our income before we retire, or
  2. We might outlive our retirement savings and have to depend on family or friends or find ways to generate income.

The survey also showed that only 9% of people can replace 80% or more of their income. And according to some independent financial advisers, 90% of their clients will be unable to retire comfortably!

Five factors that could affect your retirement investment

1. Moving your investment around to take advantage of market volatility

Investing for your retirement is a long-term goal, but markets can be volatile over shorter periods. However, moving your retirement funds between funds to try and benefit from these volatile periods can lock in losses and be detrimental to your final outcomes.

These short-term decisions might not affect you if you’re far away from retirement. Still, the closer retirement gets, the more these movements can (and probably will) impact your final retirement investment/savings.

Our top tip: Ensure your investments’ asset allocation relates to the risk you can take, depending on where you are in life currently. This will minimise the effects of market volatility on your retirement investments.

2. Inflation

Inflation is, unfortunately, not going anywhere. And if inflation affects your buying power now, it will also affect your buying power in retirement. You need to protect your investments’ buying power by ensuring the returns are greater than inflation. Therefore, you cannot be too conservative. Conservativeness might preserve your capital for the short term, but it will most likely mean your retirement savings will not keep up with inflation over the long term.

Our top tip: Take on sufficient risk and invest in growth assets.

3. Lifestyle cost creep

We are constantly absorbing rising living costs (electricity, water, food, and healthcare), and because they are linked to consumer inflation and impact our budgets, we are generally aware of them. But the more we earn, our lifestyle cost tends to increase, and this ‘lifestyle creep’ can catch us off-guard. As our income increases, we spend more on clothing, accommodation, and cars. Travel, food, and entertainment costs also tend to go up.

The danger of this lifestyle creep is that it can happen slowly, so we aren’t always as aware of it as we are of our basic living costs. And if we enter retirement disillusioned about the actual cost of our lifestyle, we will undoubtedly experience a shortfall.

Our top tip: Keep track of all your expenses through a budget, and don’t lose sight of how much it costs to maintain your lifestyle.

4. Life expectancy

Projections of how much we need to retire with dignity are based on the average life expectancy when we start investing for our retirement. But people are living longer! Statistics South Africa shows the average life expectancy of South African men as 64.6 years and South African women as 71.3 years (compared to an average life expectancy of 54.7 years only 10 years ago in 2010!) Living longer means we have to account for additional healthcare and other specialised costs that go with getting older on top of our usual living costs.

Our top tip: Keep the changing life expectancy in mind to ensure you can retire comfortably. You might have to fund more than 30 years as a retiree!

5. Other circumstances

Certain life events have a massive impact on our financial position, including marriage, divorce, births, deaths, illness, and injury. You might have to support other loved ones financially or have ongoing medical expenses.

Our top tip: Adjust your retirement investment/savings as needed, especially after a significant life change.

The reality is this… Most of us start off great when providing for our retirement. We start a retirement annuity or join our employer’s pension fund. We regularly contribute to our retirement investments, but we (almost) never check if we’re on track to retire without downscaling.

As we mentioned at the beginning of the article, you can do something if the retirement stats aren’t in your favour right now, but you should probably start doing it sooner than later. This next section will help guide you so you can meet your retirement goals and targets and reach your desired outcome.

Six ways to help you retire with dignity

  1. Review your retirement investments annually to ensure your projections are accurate and that you’re making sufficient contributions. It’s also good to review your goals and responsibilities or update your beneficiaries.
  2. If you are saving for retirement via your employer, you should probably increase your contribution as the chances are you aren’t saving nearly enough. You can also supplement your savings with regular or lump sum contributions to your personal retirement annuity.
  3. Keep a realistic monthly budget to stay on top of your true lifestyle and living costs. This will go a long way in helping you understand how much money you will need once you’ve retired.
  4. Don’t withdraw from your retirement savings. Not even when you change jobs. The smallest withdrawal can have a huge and long-term impact.
  5. Be smart about debt. Debt obligations will reduce the money you have available once you’ve retired, so plan accordingly.
  6. Consult a professional to help you reach your desired outcome. Retirement is not a one-size-fits-all game. A professional will be able to help you with your unique circumstances and current living costs to determine how much you must save to enjoy a comfortable and dignified retirement.

As a member, client, or broker to one of mCubed Group’s Retirement Funds, we strive to provide you with the best investment administration and advice, excellent service, and complete transparency for the best long-term results. We will continue to inform our decisions based on long-term earnings power, diversified portfolios, and bonds. As always, our fund-appointed FAIS accredited financial advisors are here to ensure you get to a safe, financially sound, and prosperous retirement.

For assistance regarding your retirement, please feel free to contact us.