Don’t kid yourself that retirement planning is for those nearing retirement; the decisions you make early on in your life have the greatest impact on your investment. The sooner your plan kicks off, the longer your investment period, with more contributions and more time for the power of compounding to work its magic.
“Current financial pressure, the instant gratification culture and the propensity to live in the moment means that for many, retirement planning is simply not a priority,” says Wanita Isaacs, investor education manager at independent African asset manager Allan Gray. “As a result, only a small minority of us can afford to retire comfortably.”
To plan effectively, you have to know how much you’ll need. Start with this simple calculation: look at your current budget and decide how you want or expect each item to change when you retire. This will give you an idea of the percentage of your salary you’ll need as an income during retirement.
- Do you expect to own your own home having paid off your bond? If so, you can remove home payments from your budget. If you expect of buy or rent a bigger home between now and when you retire, you’ll need to increase your allocation for housing.
- Will your car be paid off or are you planning to buy an expensive car that will need to be paid off during retirement?
- Medical expenses. As you get older, your doctor’s visits, medication and medical aid contributions are likely to start increasing. In addition, medical inflation is usually higher than the average inflation. Currently it’s 3% higher.
- Will you still need to pay your children’s or grandchildren’s school fees? Education inflation is typically around 4% higher than the average inflation.
Once you’re clear on how much income you’ll need in retirement, you’re ready to start planning how to get there. Firstly you need to consider how long you have until you retire and how much you can afford to save after other essentials. The longer you have, the less you’ll have to save on a monthly basis to reach your goal. If you can only afford to set aside a small amount, you need to consider retiring later.
Then, you need to think about how much risk you can stomach, as this will affect your decision about how much of your monthly savings to allocate to each asset class. Equities have historically provided the greatest returns over the long term, but at higher levels of risk than bonds and property. On the surface, cash appears risk-free, but remember that inflation is constantly eroding the purchasing power of your capital. So while it’s highly unlikely you’ll lose your capital if it’s sitting in the bank, the amount of interest you’ll earn on it doesn’t always beat inflation and means your money effectively loses value in the long run. Consider what range of potential after-inflation investment returns you could expect given your asset allocation or unit trust decisions.
If you’re uncomfortable making your own asset allocation decisions, you can invest in an asset allocation unit trust, such as a balanced fund, where the investment manager makes the asset allocation decisions on your behalf.
Finally consider using a government-approved retirement savings product, such as a retirement annuity, which offer great tax benefits. But make sure you do your research as you usually cannot access your investment until retirement.
Making investment decisions is complex. Consider speaking to an independent financial adviser to help you design and maintain a plan best suited to your circumstances.
If you are looking for ways to supplement your income during retirement begin by looking at your home. You can spend part of its value by applying for a reverse mortgage. Under the mortgage agreement you will be given money to help you pay for medical bills and other expenses after you retire. A standard loan would require you to make monthly mortgage payments back to your lender. However, reverse loan lenders do not require any such repayments early on. In fact, there are plenty of reverse-mortgage financial calculators to help you determine how much they will be paying to you. The only major requirement of a reverse loan is that you must continue to live in the residence until the balance is paid. Failure to do so will result in the full balance being due right away. But for the duration of the loan you can live in and maintain the home with full ownership.
“A good investment plan is tailored to your personal circumstances. If you’ve missed the opportunity of starting to save when you started working, or you currently can’t afford to put away as much as you need to, your plan could be adapted to a later retirement date or larger contributions when you can afford to increase them,” says Isaacs.
“Once your plan is in place, review it annually and change your contributions as appropriate,” Isaacs concludes.
Thandi joined Allan Gray in 2008. She is a senior member of the distribution team having previously worked in legal and compliance and marketing in the financial services sector. Thandi completed her Masters of Business Law at the University of KwaZulu-Natal and is an admitted attorney.