Many South Africans are simply not saving enough money to cover their costs when they retire, let alone maintain their desired standard of living. Here’s how to avoid some common mistakes and get back on track.
When you retire, your pension should be enough to pay you about 75% of the income you were receiving while employed. “Unfortunately, global statistics tell us that less than 5% of people who retire can actually afford to do so and consequently are unable to maintain the lifestyle they are accustomed to or had hoped for in retirement,” says Anthony Palmer, Carrick Group Commercial Director.
If you plan to retire at 65 you will potentially need to provide income for 20 years or more and you may already have realised that your retirement savings are inadequate.
“Instead of getting paralysed by trying to cover every possible aspect of retirement planning perfectly, rather break it up into simple, executable basics – then cover the basics excellently,” advises Palmer.
Common mistakes – and what to do
- Not having a plan
Do you know how much you need to put away to be able to at least cover your living costs and ideally maintain your current lifestyle? Will you have any source of income when you retire? How will you bridge the gap between your income and expenses if there is one? Do you fully understand the ‘risks’ associated with only investing into a pension? “If you only save for retirement, and don’t cover your income with insurances, you run the risk of having to dig into your retirement pot due to unforeseen circumstances,” says Palmer.
What to do: Carefully assess and calculate your retirement needs – including increased health requirements that come with age. Educate yourself on the options available to meet your goals, then commit to following your chosen plan. Ideally, consult a financial advisor to ensure you are making the best decisions for your circumstances.
- Not saving consistently and smartly
“Starting to save too late or backing your own business as your retirement plan are common pitfalls,” says Palmer. Having all of your wealth invested in your business ventures is a very risky retirement plan. “Too often we have seen this go wrong and people are left with no business and no retirement provisions.”
What to do: Start saving as early as possible. If you think your retirement savings aren’t on track, make changes while you are still working. Save as much as you can by contributing to a retirement annuity. Find a trusted financial advisor that can help you with investment choices and keep your portfolio balanced.
Hanging on to poor investments…
Or sticking to ‘safe’ investments. We all make mistakes but if your money is not working for you, you are losing out on an opportunity to generate future income. Many people are also afraid to take even small investment risks that have a high probability of boosting their returns. However, there’s always a trade-off between risk and return.
What to do: Protect yourself through diversification. “The principle of diversification is that when one asset in your portfolio drops in value, another one rises, thereby smoothing the peaks and troughs in your portfolio,” says Palmer. “Spreading your investment across asset classes, geographies, currencies and industries is one of the few time-tested strategies for investors with long-term financial goals.”
- Lack of education around tax implications
Many people draw from their retirement accounts, not realising the taxes implications and penalties.
What to do: Familiarise yourself with the tax implications and use the tools allowed by the government. “For example, in South Africa you can get a tax deduction by contributing into a retirement annuity, you can save R33 000 per annum in a tax-free savings account and you can invest for the medium term through a tax-efficient endowment,” advises Palmer. “Internationally, there are several solutions that offer administrative, succession and tax efficiencies.”
- Living beyond your means
You may already realise your retirement savings are not where they should be, yet keep living beyond your means. If you’re concerned about whether you can afford to retire in five or 10 years, cut back now – you can still make a difference.
What to do: At some point you need to stop trying to get more and work on protecting what you have. This includes setting aside for the unexpected – unexpected market changes or tax increases and inflation, as well as changes in your daily living costs or earning potential. “Once you accept the inevitability of change and work on adopting an attitude of resilience (being able to bounce back from unexpected changes – finding new solutions) you are on the right track. A long-term approach and staying the course is key,” says Palmer.
The bottom line: retirement planning isn’t something to put off. “It’s the one area of your life where justifications just don’t cut it,” says Palmer. “Do you really want to spend your retirement full of worry and struggling to get by?” Adopting a savings mindset and having a well-thought-out financial plan will help you avoid the frustration, disillusionment and stress associated with market dips and keeps you focused on the long-term goal – and enable you to retire comfortably.