Saving for retirement at 40:
We all know the benefits of starting to save early on i n your ca r eer, especially with regard to retirement. Having a long-term savings horizon, combined with the benefits of compound interest, will ensure that you have a c omfor t a bl e r e t i r ement. Compound interest over a long term has a profound effect on our f inances and ensures that when the time comes to retire that we have a large sum at our disposal.
Unfortunately, come retirement, many find that their savings are far from suff icient to see them through their golden years. According to Sanlam, only 30% of retirees believe that they will have sufficient capital for the rest of their lives, more than one-third have already depleted their lump sum (with lump sum depletion usually happening within two years of retirement on average) and nearly a quarter of retired people have financial dependants.
With these shocking statistics, how can you ensure that you are well-prepared for the inevitable retirement, especially if you are in your forties or fifties and have only just begun to think about retirement savings?
Says Anele Mbuya, senior marketing actuary at Old Mutual: “After realising that it is critical to save for retirement, the next thing to do is to contact a financial adviser. Financial advisers will advise you on which savings vehicles or products you can use in order to save for retirement; in addition your adviser will determine the monthly premiums you would have to save in order to better your savings situation.”
Karin Muller, head of Growth Market Solutions at Sanlam Personal Finances, reiterates the importance of speaking to a financial adviser. “Start with a financial plan. As part of your financial plan there are a couple of decisions that you can take to help your retirement position – such as possibly retiring later.
“Not only does this allow you a longer time to save, but it also provides a longer period for your money to grow. Delayed retirement is l ikely to impact your retirement plan.”
If they have the option, many opt for staying in their current jobs longer, while others choose to slow down their pace and choose a lower paying, part-time job.
“If people cannot delay retirement, they can still defer using their retirement income by f ind an alternative income source. This is a trend that we are seeing in other places in the world where people change careers at retirement – some work shorter hours or start working for businesses like NGOs,” she says.
But can you enjoy the same level of financial-freedom during your retirement years as your working years? Jeanette Marais, director of distribution and client services at Allan Gray, says that “to achieve the same level of income [if you’ve start saving at 40], 70% of final salary, you need to save approximately 23% of your salary or achieve an investment return of 11.5% above inflation.
“Both seem daunting, but if you can achieve an investment return of 7.5% above inflation, you’ll have to save 17.5% of your salary.”
While it may sound confusing, the added benefit of a f inancial planner will ensure t hat you have a clear understanding of the path you need to take in order for you to retire comfortably.
According to Muller, “A staggering 28.5% only seek advice when they are about to enter retirement.” Even if you f ind yourself in your forties or f ifties without an adequate plan for retirement, it is not too late to seek advice – don’t wait until you are in your sixties before speaking to someone. “The lesson is that investment success is not only about skill. It's also about behaviour. You need to be realistic about how much capital you require to be able to enjoy an income in retirement close to what you had when you were still working,” says Marais.