Retirement Should Be The Best Time Of Your Life.
Retirement should be the best time of your life. Especially when you have spent about 55-65 years working so hard toward it. These years are often spent split between, working hard in high school so that you can get entry to university, so that you can study hard to get a qualification, in order to get a job, so that you can work hard in that job, in order to get promoted to work harder in a more qualified and skilled position in that job. All this – in the name of building sustainable income for both your present and future. However, what happens if in the years that you are supposed to be living your best life in retirement, instead your tight retirement budget leaves little room for the rest and enjoyment that you have earned?
Retirement savings is important. However, often neglected because of the immediate demands that we face in our month-to-month budgeting. Although sometimes, the delay in saving toward retirement has nothing to do with affordability at all. Let us examine four common hurdles people often face when saving toward retirement.
1. “I have a lack of investment and savings understanding.
Investing and saving can be complex and specialised and is therefore not something a person should have to figure out on their own. The mere feeling of being overwhelmed, is enough to cause some people to avoid the conversation entirely. There is a lot of information available around us, some of it is public opinion and some is professional advice. Alone, we would have to decipher which is which. Once the deciphering is done, the application of that advice then still needs to be accurately applied to our personal financial situation. There are many things that a person needs to take into consideration, like; How much should I save? How long do I save for? What product should I choose? What are the tax implications? What legislation is there? What are my estate implications? Who will manage my portfolio? All of these questions increase stress and the risk of making an uninformed financial decision. Financial guidance has a valuable place in this process.
2. “I’ve got time, why must I start now?
Starting too late when saving toward retirement is largely the problem. Many individuals between the ages of 20 and 35 feel that “Retirement is centuries away and it needs no urgent attention so, let’s rather leave it for now”. A very important element that has been left out of this logic, is the power of the time-value of money. Two best friends to investors that start saving early are ‘compound growth’ and ‘risk/return profile’.
2.1. Compound Growth
We are going to look at a scenario that illustrates the power of compound growth over time, you can choose which investor you would like to be, A or B. Let us assume that both investments are growing at 10% each year, inflation is 6% and escalations to contributions are also 6%. Both are retiring at 65 years old.The only difference here is the age each investor started saving and how much they are contributing.
We can see that if we start saving R1,300.00 each month increasing annually at 6% from 20 years old until we are 65, growing at 10% per year, it totals to a future value of R 25,364,999.46 to retire on. That sounds like a lot of money, but how much is that actually worth today, taking inflation into account?
That is worth about R1,842,769.10 if they were retiring today. This allows a monthly income of R9,247.15 to live from in retirement for 25 years (Assuming that you live until the age of 90). Is R9,247.15 a month enough for your monthly expenses?
We can see that if we start saving R1,300.00 each month increasing annually at 6% from 30 years old until we are 65, growing at 10% per year, it totals to a future value of R 8,758,614.17 to retire on. Again, that sounds like a lot of money, but how much is that worth in today’s terms.
That is worth about R1,139,541.41 if they were retiring today. This allows a monthly income of R5,718.15 to live from in retirement for 25 years. (Assuming that you live until the age of 90). Is R5,718.15 a month enough for your monthly expenses?
2.2. Risk / Return Profile
We all know that taking on additional risk usually results in higher potential returns. However, we need time on our side in order to benefit from the risk of growth assets. The greater the risk/return of an investment, the more time an investor should stay invested and avoid withdrawing. The earlier a person starts saving, it allows them to take on a higher risk/return investment. Again, with compound growth this effect is powerful.
Let us assume that both investors started saving at 20 and are retiring at 65, both are earning the same and contributing the same to retirement each month, inflation is 6% and escalations to contributions are also 6%. However, Investor A is getting a 10% return each year and Investor B is getting about 12% each year.
The Retirement Savings starting at 20 years old, with a monthly contribution of R1,300.00 that grew at 10% each year, totaled to a future value of R 25,364,999.46 to retire on. That is worth about R1,842 769.10 if they were retiring today. This allows a monthly income of R9,247.15 to live from in retirement for 25 years. (Assuming that you live until the age of 90). Is R9,247.15 a month enough for your monthly expenses?
The Retirement Savings starting at 20 years old, with a monthly contribution of R1,300.00 that grew at 12% each year, totaled to a future value of R 43,744,935.57 to retire on. That is worth about R 3,178,072.82 if they were retiring today. This allows a monthly income of R15,947.81 to live from in retirement for 25 years. (Assuming that you live until the age of 90). Is R15,947.81 a month enough for your monthly expenses?
It is key to prioritize savings early because these two elements of risk/return profile and compound growth do most of the growth work for you.
3. “I did start saving, but it was too little”
Sometimes, people have been saving and investing each month, but when it accumulates over time it is not enough to retire on, especially if the person is looking to maintain their current lifestyle into retirement. This is where a pre-retirement financial plan comes in handy. Implementing a financial plan helps you understand the projected shortfalls at retirement that you could face and what additional per month savings you will need to contribute in today’s-terms, in order to meet what is actually required in retirement.
A financial plan helps implement a palatable strategy to achieving these goals. South African statistics show that the majority of South Africans, have the habit of spending more than they earn and when they do save, they save too little. A simple way to overcome this is by implementing a household budget. Another way is to prioritize specific saving areas or setting investment goals.
Disciplined savings toward goal-oriented outcomes like a holiday, an education, a debt-free car or becoming a home owner, shows to have high success rates in achieving those savings goals. Financial goals are much like fitness goals, setting a solid vision and implementing a consistent plan to get there is key. If you would like some assistance from our one of our consultants in implementing a pre-retirement plan or a goal-oriented saving strategy please click here.
4. “I am saving toward retirement, but I want to withdraw early”
Not preserving retirement savings is a big challenge which we all face at some point. Life enjoys to throw unexpected tricky choices at our finances at times. Whether it be a sudden blown gasket in your car, the house you have always wanted to buy finally becomes available ‘For Sale’, your children need to start university, a business idea drops into your heart or you really just want to settle that loan…
We have a choice to make; “Are we going to withdraw from retirement for this?”. The most challenging part of this choice, is that each of the examples above hold good intentions. However, are we willing to take the money from retirement savings to cover it? Each person has their own personal convictions on this. However, our heart at Fairtree Invest is that you make a well informed decision before submitting a withdrawal. Speak to a Fairtree consultant. Professional guidance can avoid regretting a choice made under pressure or lack of knowledge. Often, there are hidden implications when withdrawing from retirement that people were not expecting like large tax implications, restrictions on withdrawal amounts and it affects your compound growth.
It is important to note that Financial Planning should continue into Retirement as well. Retirement Plans are set up by your wealth manager. They create a dynamic retirement plan for you, positioning your personal portfolio as time goes on. At Fairtree Invest we offer our client’s a seamless process which includes portfolio positioning before retirement and portfolio positioning after retirement. This enables a stress-free transition between saving toward your retirement, into receiving income from your retirement. Stay close to the experts. “You are the average of the five people you spend the most of your time with” – Jim Rohn.
Should you need any assistance please contact us on email@example.com.
– Kheara Kroggel