A rainy-day fund shouldn’t eat into your future financial security
Facing retirement with insufficient savings to maintain a certain lifestyle is a reality for more people than should be the case.
In theory, if you contribute to a company pension fund, and possibly put some money into a retirement annuity or unit trust, you should be able to at least get close to that goal.
Unfortunately, this applies to too few people. This might be due to insufficient planning, or simply because life intervened and money meant for retirement was diverted elsewhere.
Andrew Davison, head of advice at Old Mutual Corporate Consultants, says this is common, which is why rainy-day savings should be considered as important as retirement savings.
“We realised you can’t focus on one or the other — you have to make sure people have a comprehensive plan in place that addresses all their needs,” he says. “If you only focus on one need, then the other needs aren’t catered for and savings that are meant for a particular need have to be diverted to plug a gap elsewhere. This jeopardises the initial need too.”
Davison suggests an effective retirement strategy is for investors to allocate 15% of their pretax salary to retirement savings. With a goal of achieving investment returns of CPI plus 5% each year, and preserving savings when changing jobs, your chances of financial secu- rity in retirement are good.
For many, the years leading up to retirement are crunch years in which they save furiously to catch up on 20 or 30 years of negligence. But unless they’re able to significantly increase their contributions, they will be playing catch-up.
Allan Gray product development manager Daniel van Andel says shorter time horizons not only raise contributions, but they may also mean investing in higher-risk assets to get higher returns.
“There is no silver bullet,” he says. “This problem requires a multifaceted approach. We continue to educate clients on what they need to contribute, but it’s unlikely to be effective in and of itself.”
Something else to consider is the potential benefit of delaying your retirement, even if only by a year or two, he says.
The legacy retirement age of 55 is one that all industry participants see as the low-hanging fruit that can help individuals achieve their retirement goals. This is particularly so due to longer life spans and because many people can work well beyond that age.
Change is taking place, with some companies extending their mandatory retirement age.
However, Van Andel says highlighting the need to stick to a retirement savings strategy is important too. This is even more so given that investors now have greater control over their retirement savings.
“In the past, many individuals saved for retirement in defined benefit schemes where there was no need for them to make decisions. While the trend to defined contribution schemes has resulted in greater transparency and competition, investors who are unable to access good independent financial advice have been left to make important financial decisions on their own,” he says.
“Investors’ growth asset exposure while saving for retirement is a case in point. Prior to the introduction of regulation 28 [of the Pension Fund Act, which limits how much may be invested in particular assets], many investors were invested 100% in equities, whereas now most invest in one or more ‘balanced’ funds. While balanced funds are gen- erally versatile offerings, there is something to be said for providers offering solutions which enable investors to maximise growth asset exposure early on in their retirement savings journey.”
This point is taken up by Davison, who says he encourages investors to increase their equity exposure over a cashonly or cash-dominant position.
“Cash is … exactly the opposite of what you perceive it to be,” he says. “Cash is considered a safe option, but it doesn’t generate returns that are well above inflation. So though it might be the least volatile [investment], it’s actually the riskiest in terms of achieving your goals.”
The battle to help people prepare for a post-work life is not new. And merely hoping the situation will change is insufficient. But retirement regulation reforms, and adaptation by fund managers and employers, may drive some progress on the issue. ●
“Highlighting the need to stick to a retirement savings strategy is important too
Daniel van Andel … No silver bullet