Sino Booi, Product Management Lead at Momentum Savings
The big question in South African retirement planning has long been whether you have enough. It is an important starting point, but focusing solely on savings towards retirement is no longer enough.
To stay resilient and relevant, we have to ask whether a retirement portfolio has the growth potential to survive unforeseen cost shocks. These can arise decades into the second half of life.
Retirement plans can hit a bump in the road, not because of insufficient income levels at the start, but because we underestimate the expenses during retirement. Many cashflow models tend to overlook cost shocks that can derail even the best plans.
The big drivers of retirement shortfalls
To build a robust retirement strategy we must acknowledge what will increase the cost of living as we age.
1. Retiree inflation is higher
The overall rise in prices across all goods and services in an economy rarely reflects the reality of a retiree’s expense basket. In South Africa, medical scheme contributions, municipal rates, electricity, security company and care costs are often higher than published inflation figures.
2. Retirement living can become more expensive over time
While retirement estates and villages offer security, lifestyle benefits and convenience, the levies often escalate faster than inflation. Life-right schemes don’t appreciate in the same way as freestanding property. Also, when one partner requires frail care while the other remains independent, it can play havoc with a household budget.
3. Paid off doesn’t mean cost-free
Many retirees aim to have a paid-off house and car. But major roof repairs, damp proofing, replacing a vehicle, upgrading security systems or replacing backup power solutions can be nasty surprises. In the second half of life, these expenses can quickly drain your capital.
4. Adult dependants can extend into retirement
It’s not uncommon for retirees to support adult children or grandchildren financially. These recurring expenses can shorten the lifespan of a portfolio drastically.
5. Cognitive decline can leave you exposed
A retiree may become mentally and or physically vulnerable and unable to look after their own affairs. If you’re not as sharp as you used to be, you will battle to manage your portfolio. Clear financial governance, estate planning and trusted support structures are valuable assets to have.
6. Care costs can escalate rapidly
The transition from independent living to assisted living, home-based care or specialised dementia care is rarely planned for in detail. We hope it won’t be necessary, yet these costs can spike exponentially.
7. Living longer remains a huge risk
The biggest risk may be outliving the assumptions built into the plan. If a retirement strategy is structured around 20 years, but retirement lasts 30 or 35, the cost of those later years is often the most expensive period. Healthcare and care-related inflation can spin out of control.
8. Medical aid can become a pressure point
Medical aid contributions often become one of the largest monthly expenses. More comprehensive plans, not simpler ones, are needed as healthcare needs evolve. Out-of-pocket costs for chronic medication, specialist consultations, gap cover and procedures not fully covered by schemes are also stark realities. A contribution that feels manageable at age 60 can throttle you by age 75 or 80.
The antidote to cost escalation is investment growth
The relationship between rising costs and investment strategy is inseparable. If a retiree’s living expenses increase faster than inflation, their investment portfolio needs to deliver steady growth above inflation to maintain their purchasing power.
Shifting the professional discipline
As the retirement conversation continues to evolve, we must focus not only on saving more, but also on by how much our expenses will increase. We must be prepared for shocks.
ENDS
