What is a good re­tire­ment, and how will I know if I’ll get there?

It is im­per­a­tive that re­tire­ment funds com­mu­ni­cate with their clients in a clear, jar­gon-free way and ex­plain what a client can do if their in­vest­ment shrinks or is not grow­ing at the de­sired rate.

Finweek English Edition - - COLLECTIVE INSIGHT - By Shaun Le­vi­tan and Costa Economou Shaun Le­vi­tan and Costa Economou are co-founders of Colour­field Li­a­bil­ity So­lu­tions.

al­bert Ein­stein once re­marked to Werner Heisen­berg: “In the West we’ve built a beau­ti­ful ship, and in it we have all the com­forts. But ac­tu­ally the one thing it doesn’t have is a com­pass, and that’s why it doesn’t know where it’s go­ing.” To­day we have a re­tire­ment in­dus­try that prides it­self on in­no­va­tion. It is pos­si­ble for mem­bers to view their ac­cu­mu­lated re­tire­ment sav­ings in real time, con­struct their own port­fo­lios and switch into any in­vest­ment port­fo­lio at a mo­ment’s no­tice!

But ask a mem­ber whether the R500 000 in ac­cu­mu­lated fund credit is suf­fi­cient for their re­tire­ment and the chances are that they will not know. Our beau­ti­ful re­tire­ment ship has pri­ori­tised its at­ten­tion to ac­cu­mu­lat­ing a “pot of money” but has lost fo­cus on whether this pot will ac­tu­ally be enough.

Rethinking re­tire­ment should be­gin with a sim­ple ques­tion: “What is a good re­tire­ment?” For most, a “good re­tire­ment” is one in which you are able to main­tain your stan­dard of liv­ing in re­tire­ment. This is achieved by be­ing able to re­place the in­come that was earned dur­ing your work­ing years. In other words, a good re­tire­ment is one in which we are in a po­si­tion to re­ceive a level of in­come that meets our ex­penses each month, in­creas­ing in line with the cost of liv­ing for the rest of our lives.

Once this in­come goal has been es­tab­lished, it is pos­si­ble to start com­mu­ni­cat­ing mean­ing­fully with mem­bers and en­cour­ag­ing the right be­hav­iour.

Con­sider the sit­u­a­tion of a mem­ber who re­ceives a state­ment from their re­tire­ment fund that shows they are on track for R5 000 a month of in­come (in to­day’s money) when they re­tire in 30 years. In the first in­stance, this com­mu­ni­ca­tion is mean­ing­ful and un­der­stand­able to the mem­ber. They didn’t re­quire fi­nan­cial ed­u­ca­tion on in­dus­try jar­gon like stan­dard de­vi­a­tion, volatil­ity and in­for­ma­tion ra­tios. They are also able to have some idea whether this will be suf­fi­cient for their unique life sit­u­a­tion.

As­sum­ing they are not on track to achieve their in­come goal, they can rem­edy this in three ways:

1. They can con­trib­ute more;

2. They might be able to re­tire later; or

3. They can take more in­vest­ment risk. An ideal com­mu­ni­ca­tion frame­work needs to il­lus­trate the im­pact of one or more com­bi­na­tions of the above reme­dies. The il­lus­tra­tion needs to be sim­ple, mean­ing­ful and un­der­stand­able to the mem­ber, and it should ideally avoid fo­cus­ing on jar­gon like “per­cent­age of pen­sion­able earn­ings” and “post re­tire­ment re­place­ment ra­tios”. The ben­e­fit of such a frame­work is that it is pos­si­ble to quan­tify and com­mu­ni­cate the im­pact of an ad­di­tional R100 a month of con­tri­bu­tions. For ex­am­ple, a mem­ber is more likely to save more if they know it is needed (i.e. they are cur­rently ex­pected to re­ceive less than what they need) and they can see the ben­e­fit. With­out any con­text, R100 more saved to­wards re­tire­ment pro­vi­sion is just R100 less avail­able to spend to­day. A cal­cu­la­tion that shows that an ad­di­tional R100 saved to­wards re­tire­ment sav­ings each month is ex­pected to yield an ad­di­tional R500 a month of in­come (in to­day’s terms) pro­vides mean­ing­ful in­for­ma­tion that al­lows the mem­ber to bet­ter tar­get their re­tire­ment needs.

This ex­tends to anal­y­sis show­ing the im­pact of re­tir­ing early or how ad­di­tional years work­ing and there­fore sav­ing can im­pact on them.

From an in­vest­ment per­spec­tive, a state­ment that com­mu­ni­cates in “in­come”, rather than one that fo­cuses on the pot of money, high­lights to a mem­ber whether they are in a bet­ter po­si­tion than they were at the start of the re­port­ing pe­riod. It should be cold comfort to a mem­ber if their equity port­fo­lio out­per­formed a mar­ket in­dex but un­der­per­formed the in­crease in cost of pro­vid­ing in­come in re­tire­ment. Con­versely, a pe­riod of neg­a­tive per­for­mance or a de­cline in your ac­cu­mu­lated re­tire­ment fund sav­ings is not nec­es­sar­ily some­thing to be con­cerned about if the cost of pro­vid­ing in­come in re­tire­ment fell by a greater amount.

We should take ac­count of what Al­bert Ein­stein said by rethinking re­tire­ment and shouldn’t fo­cus on the jour­ney with­out keep­ing the des­ti­na­tion in mind. There re­ally is no point in hav­ing all the com­forts if you don’t have a com­pass to tell you where you are go­ing! ■

A good re­tire­ment is one in which we are in a po­si­tion to re­ceive a level of in­come that meets our ex­penses each month, in­creas­ing in line with the cost of liv­ing for the rest of our lives.

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