Cheapskate’s guide to retirement
BIG DECISION: SPENDING YOUR ‘FORTUNE’
Unfortunately, the average, middle class salary-earner won’t become a millionaire by saving, investing and managing their lifestyle downwards. But these are still valuable financial principles that can provide a buffer when there are financial bumps in the road.
Amarket commentator recently asked me what I planned to do with the money I’d saved and invested by being a cheapskate. Maybe he assumed a journalist who had amassed a fortune after receiving inflation-related increases and sidestepping several rounds of retrenchments, would retire at 35, buy an island and splurge on a lifetime’s supply of Moët?
Truth be told, the 2.3% of us fortunate enough to be in this position, consider it a very good month when we don’t have to buy chicory instead of coffee. Here are some points to consider:
Things will go wrong
Unforeseen expenses are part of life. I recently had a health scare. Being young, fit and healthy I only have a hospital plan, and specialists charge in advance in hard cash.
With unemployment at a 14-year high and the economy still under pressure, retrenchments are a reality.
As such I was surprised to learn there are industries that actually pay a multiple of your salary as a bonus. If you work in one of the M industries – media, mining and manufacturing – bonus and retrenchment packages look much the same (two weeks’ pay per year served for retrenchment or in the case of bonuses).
The retrenchment story’s no longer limited to the M industries. Your ability to earn an income is your most valuable asset. What would you do if you lost your job?
Returns are expected to be lower
Old Mutual Investment Group research shows investors in a balanced fund with a 60:30:10 exposure to shares, bonds and cash would roughly have earned an afterinflation return of 7.6% over a 56-year period. Over the past three years, the fund only outperformed inflation by 2%.
It expects a 3.7% real return – less than half the return investors were used to!
Any future performance projections should be taken with a pinch of salt, but the message is clear: investors won’t be bailed out by returns in the near future. Investors will have to save much more to get to the same position.
You’ll likely live longer than you think
People are living longer. Having to support yourself in retirement for 20 or 30 years is a tough ask, even if you have enough money. What if you don’t have enough, like most South Africans?
Recently Sunel Veldtman, Foundation Family Wealth CEO, argued that the idea of retirement at 60 is outdated. It’s a very important point. Many South Africans won’t have any choice but to work to 75 or 80, but employers may force them to retire at 60 and they’ll have to supplement their income.
Also, medical needs often greatly exceed people’s ability to pay for health care in retirement.
It’s tough out there. You can’t plan for every eventuality, but putting yourself in a position to weather the storm is what financial planning is all about.