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.
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.