• Editor

Could you survive on less than a third of your income in retirement?


Despite taking steps to save, South Africans are at risk of having to make significant lifestyle-related downgrades when they are no longer actively earning an income.

Being able to retire comfortably is a common goal when it comes to long-term financial planning.

“Yet many of us miss the mark and face the realisation that we do not have the money to maintain the lifestyle we have become accustomed to, even though we took the right steps to save for retirement. This often occurs when it is too late,” says Twanji Kalula, investment writer at Allan Gray.

He says it is a widely held belief that to replace at least 75% of our final income at retirement to maintain a similar lifestyle, we should be saving anything from 12% to 17% of our income from the day we start working.

Yet, according to a recent retirement industry survey, the average South African retiree can replace just 31% of their income with their retirement savings: a sobering reality.


“In real terms, this means that after working for decades, most of us will be forced to live on less than a third of our pre-retirement income or face the very real risk of outliving our retirement nest egg.”


Kalula says that regular contributions into a retirement annuity (RA) or an employer’s pension fund do not guarantee a positive outcome.


“One of the easiest ways to mitigate the risk of not having enough money when you retire is to perform an annual review of your retirement investments to ensure that your projections are accurate and that your contributions are sufficient to meet your end goals.”

He says another mistake that many make who invest for retirement via employers is anchoring on the default contribution amounts suggested by employers’ retirement saving schemes.

“Consider increasing your contributions, or supplementing these savings with regular or lump sum contributions to a retirement annuity in your own name. You can also supplement your retirement savings with contributions to a long-term investment product, such as a tax-free investment, which can help you increase the amount of cash available to you at retirement,” says Kalula.


Given that accumulating a nest egg takes decades, he adds that investors need to consider the factors that may shift the goal posts over time, such as markets being volatile.

“To minimise the effects of market volatility on your outcomes, make sure that the asset allocation of your investments is appropriate for the amount of risk you can afford to take based on your current life stage.”

He also says that is very important to account for consumer price inflation (the rising prices of goods and services), and the less obvious lifestyle inflation.

“Take on sufficient risk by investing in growth assets to achieve real returns. Investors who are too conservative when it comes to investing for their retirement may preserve their capital over the short term but find that their nest egg has failed to keep up with inflation over the long term,” he says.

“Accounting for lifestyle inflation is trickier: If you do not factor in the true cost of your lifestyle when planning for your retirement, you will inevitably experience a shortfall when you are solely reliant on your retirement nest egg. One reason for this is that the contributions you made in the early years were based on your income and lifestyle at the time; you may have to factor this discrepancy in your current contributions.”


Given that South Africans are living longer, it is becoming more likely that young professionals may need to prepare to fund more than 30 years in retirement.

To further improve your financial position at retirement, Kalula recommends the following things you can do:

  • Maintain a realistic monthly budget throughout your life to remain aware of your true lifestyle and living costs. This will help you develop a real understanding of how much income you will need in retirement.


  • Preserve your retirement savings when you change jobs. It may be tempting to access this money, but even the smallest withdrawal can have a significant and lasting impact.


  • Be mindful of and manage your debt. When you retire, you may still need to pay off a mortgage or settle consumer debt. These obligations will reduce the amount of money you will have available for your other expenses.


  • Speak to an independent financial adviser who can help you explore your unique circumstances as they assess your current living costs and help you determine how much you need to save at your current life stage for a comfortable retirement.


ENDS





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