Help, I don’t have enough money to retire

One of the key findings of the government’s study of the pension industry in South Africa is that only 6% of people save enough to replace their full income after retirement.

Essentially, most people are likely to face financial problems a few years after retirement — a grim fact that the financial industry and retirees have known for decades.

The new two-pot pension system proposed by the National Treasury aims to improve retirement provision.

While the idea that one-third of one’s retirement savings can be accessed and used at any time seems at odds with the goal of saving more, the suggestion that two-thirds is off-limits until retirement age is intended to ensure that more people have capital in retirement to have.

Read: Allow withdrawals from pension funds to increase retirement savings

The problem of limited funds in retirement will remain until the new regulations have the desired effect in a few decades.

You didn’t save enough

Hildegard Wilson, product solutions actuary at Momentum Investments, puts it bluntly: What happens when you retire and when you calculate the potential return on your retirement savings you realize you haven’t saved enough?

“Despite the current interventions such as financial education, tax savings instruments and pension reform, the situation of pension provision in South Africa has not changed significantly.

“With such a bleak picture, some might think it’s too late to change their future as they approach retirement age, but there are always steps that can be taken,” she says, stressing the importance of it , “to plan carefully”.

hierarchy of needs

Borrowing from psychologist Abraham Maslow’s well-known hierarchy of needs, she says it’s important to budget for basic needs first.

“As Maslow explained, people should first have their basic needs met — psychological needs like food, water, warmth, rest, and safety needs — before satisfying their ‘needs’ for luxury items or experiences, like an expensive outfit or a night out or a dream vacation. This hierarchy of needs can help us understand not only ourselves, but how people save,” says Wilson

“Financial savings, for example, only become a ‘need’ once your more basic needs, such as food, safety and clothing, are met – but in South Africa the prices of many basic goods have risen disproportionately compared to salaries, making it fall for most South Africans difficult to plan for their retirement.”

Read: Early access to retirement funds in at least a year

When planning your retirement, it’s still important to budget for basic needs first before moving up the hierarchy.

“If you run out of money in retirement, this is a great way to prioritize the money you have to make sure your basic needs are met,” she says, noting that high inflation can be dire.

Take inflation into account

When salaries keep up with inflation, but a person’s expenses grow faster than inflation, a larger proportion of their salary must be allocated to expenses. For example, if you spent 2% of your income on electricity in 2011 and inflation increased your salary, you spent 4% of your total salary on electricity in 2021 – the price of electricity has risen at about 8% more than the inflation rate every year for the past few years 10 years.

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The same argument applies to several other products and services that will lead to sharp falls in disposable income after basic needs are met.

Wilson presented a simple budget to illustrate their point.

Impact of inflation on disposable income

% of salary in 2011 Price increase above inflation % of salary 2021
Food 20% 1% 22%
casing 25% 1% 27%
electricity 2% 8th% 4%
Medical assistance and expenses 10% 4% fifteen%
Gasoline & Traffic 5% 1% 6%
training 10% 3% 13%
Total Major Expenses 72% N / A 87%
Available income 28% N / A 13%

Source: Momentum Investments

It’s not hard to understand that people have a hard time saving enough for their retirement.

“If we look at the above scenario, we can see that disposable income has more than halved in the last 10 years,” says Wilson.

“With less disposable income available for non-urgent needs, this has put significant pressure on people trying to save for retirement.”

What should I do?

There are several ways to address the problem of insufficient retirement savings.

The first solution is to make additional contributions to your retirement savings — but if that’s not possible, says Wilson, there’s another option.

“When they retire, many people choose to take as much of their hard-earned retirement savings as possible in cash. However, the truth is that you are more likely to burn cash if you have free access to it.

“Compound interest can create significant wealth. For example, if a modest investment return of 8% per year can be achieved and the interest is reinvested, your investment will double in just nine years,” says Wilson.

“When I discuss this with people, I try to simplify it. Either you have to make more money to pay for the expenses, or you have to reduce your expenses to match your income. Otherwise you’ll get in trouble at some point.”

Delay or ease your retirement…

She also proposes postponing or facilitating retirement. “The current retirement age of 65 was set at the end of the 18th century and was closely aligned with the average life expectancy of people at the time. After more than 100 years, is this age still appropriate since many people seem to be living longer than previous generations?

“Every person’s retirement date should be as personal as any other financial decision. Consider whether a second career entry or part-time counseling is possible.

“If retirement can be pushed back from age 65 to age 70, an income increase of more than 10% can be achieved with a lifetime pension,” says Wilson.

“Fewer and fewer people are emotionally ready to retire at 60 or 65 because they are healthy and mentally able to continue working. Also, people are living longer these days.”

“I would like to see companies offer retirees the opportunity to continue working part-time, especially if that is the case [are] not saved enough.

“Maybe some hobby income helps, but not everyone can earn enough from their hobby while being highly skilled at their job,” she says.

reduce withdrawals

Wilson notes that while most people cannot handle an immediate drop in income after retirement, there is a risk of having too much income from pension funds immediately after retirement.

“However, with coaching, most people can lower their standard of living over time, much in the same way that people tend to increase their standard of living when they receive raises. To do this, people would have to gradually reduce their drawdown level to a sustainable level by slowly tapering it back over time.

“This is a risky option because the retiree is exposed to risks such as sequencing risk. A large amount of income is being withdrawn here while markets and retirement savings are low. In this scenario, a proportionately higher percentage is withdrawn from the pension fund during a market downturn than during high asset markets,” she says.

Scale down over time

Planning for retirement is also about planning ahead of time for a lifestyle change. Many people cling to large five-bedroom homes years after the kids have left home, which means excess furniture and unnecessary maintenance and insurance costs. Sometimes people own too many cars.

“Retirement is incredibly emotional,” says Wilson. “I think people are trying to maintain some sense of normality. However, the older you get, the less mental and emotional capacity you have to sell your family home, cars and furniture.

“It costs a lot of money to live in a big house. Start downscaling as early as possible. The trick is to save extra money as well.

“We have seen in our studies that, similar to people who increase their standard of living, people can reduce their standard of living after a salary increase. It just takes a little time,” says Wilson, noting that there are ways to simplify life and replace expensive habits with cheaper ones.

The truth is that most people will have another 20 to 30 years to live when they retire after age 65th Birthday. Depending on the return on investment, a new retiree needs at least R1.3 million in their retirement fund to earn a monthly income of R10,000 for 20 years without income rising with inflation (based on a 7% return on investment). .

In reality, everyone wants their income to rise with inflation, and financial markets go up and down.

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