Pensions for longer lives
ONE MUST NOW ASSUME 35-40 YEARS POST-RETIREMENT Mitigate gap between what‘s needed and what is available.
We are living longer and ageing better – 60 is the new 40. Retirees today aren’t worn out – but when retirement can last decades, they can soon get bored.
The last of the Baby Boomers turn 60 this year, but already retirement is changing.
The actuaries who put the assumptions in place decades ago couldn’t have foreseen the impact of longevity and dramatically reduced birthrates.
More than 75% of retirees cannot afford to retire at all, and the percentage of retirees who will have to cut back on their lifestyle is even higher than that.
Tip 1: Don’t rely on investment growth to make up for not having made enough contributions to the investment.
At the very best, assume that it will maintain purchasing power (in other words, grow enough to keep up with inflation).
Once you know the income you need in retirement, you and your adviser (or app) can run some scenarios as to when you can retire.
Don’t be disheartened if the outcome isn’t what was expected. Given time, there are several variables one has control over to change the outcome:
Save and invest more; Invest monies available optimally (but see Tip One above); Consume less now or plan to consume less in the future;
Retire later/work longer/ semi-retire; or Reduce liabilities (parasitic progeny being the biggest problem for Boomers).
The original assumptions (as late as 2007 when I first started my studies in this field) were that you would live 20 years maximum post-retirement, in other words, 80-85.
Using this assumption, a financial adviser could allow a capital amount designed to produce an income/pension to be depleted over 20 years, comfortable in the knowledge that 95% of their clients wouldn’t outlive their money.
That is no longer true (and frankly, wasn’t even true then). One must now assume at least 3540 years post-retirement.
The added complication is that the Gen Xers who are coming down the retirement pipe usually want to retire earlier than 60/65, not later.
Tip 2: Owning your own home, in effect, “prepays” your rent in your retirement.
This could account for onethird of your income, so don’t dismiss it (levies and utilities must be paid irrespective of whether you own or rent).
One of the biggest wealth killers is to change homes too frequently. Every time you do that, you lose at least 10% of the value of that property.
Tip 3: Consolidate and get your ducks in a row.
After several decades of trying out different products and listening to different advice, I find that my clients often have investments scattered around without any thought to aligning them to the end objective – getting them to work for you when you don’t feel like working anymore.
This is not to say that you shouldn’t have different buckets of investments.
The smarter thing to do is to take all your investments, put them on one page, merge them where it makes sense, and align them with their end objective.
Coming into retirement, it is often a good idea to consolidate your investments.
Watching all your investments on a single table monthly (like Excel) means that you’ll have no nasty surprises at retirement (your wealth adviser may even do that for you).
Consolidation like this often brings down fees (and before you say that an extra 1% doesn’t matter, consider that on R1 million, that is R10 000 per annum).