Enough to retire with

ESCAPE THE NO-SAVE TRAP: EXPENSES TAP INTO RETIREMENT FUNDS

Longevity, job changes and having dependents could spell disaster for you.

Most of us would rather have one marshmallow now than two marshmallows in 20 minutes’ time. This tendency has disastrous implications for our long-term financial security.

Provident fund members, for instance, have access to their accumulated lump sums at retirement.

And many would then rather spend the lump sum than invest it to generate an income over the rest of their lives. Worse, we all have access to our accumulated sums at resignation.

Invest R5 000 per month over 40 years, growing at 4% above inflation and you’ll have the equivalent of R5.8 million in today’s money. If you cash that investment in halfway, and start again, the final value drops to just R1.8 million.

On average, South Africans chop and change jobs between seven and 12 times over an average 40-year working career.

Most of us cash in our accumulated retirement savings whenever we job change. The last change may leave you with only 10 to 15 years to go to retirement. With only 10 years of saving left, the above investment drops to R734 000.

Being conservative can be risky

South Africans’ replacement ratio of income in retirement is extremely low.

For example, if you were earning R50 000 in your last month of employment, your accumulated retirement savings may only purchase somewhere between R5 000 and R15 000 per month after retirement – a 70% pay cut.

One reason is that we save too little; another is that many of us invest too conservatively and therefore don’t get adequate returns.

A sandwich

If you’re in your 40s or early 50s, have teens and young adults as well as ailing parents, who are also financially dependent on you, then you are trapped in the proverbial sandwich and you are part of the sandwich generation.

These factors will conspire to prevent you from saving for your own financial security. You’ll become a burden on your children if you can’t break this poverty cycle.

100 and beyond

As a result of better living conditions, healthier habits and improvements in medical science, many of us are living longer.

The impact of longevity on savings and retirement planning is staggering.

Debt-fuelled rockets

A debt-fuelled rocket can catapult lifestyles upwards, but when the rocket runs out of fuel the results are crippling. Good personal debt is normally capital in nature and offers a legitimate leg up; bad personal debt is used to increase consumption.

Paul Leonard is advice partner at Citadel. This article was first published on https://www.citadel. co.za/media/2843/citadel-investor-2017.pdf