Beware impact of inflation on retirement costs
Younger South Africans who spent time with retirees as part of the Glacier by Sanlam # FutureFWD campaign have contemplated the effects of inflation on the cost of living in retirement.
In the project, Thoban Jappie, 42, a social media businessman, was paired with retired doctor Tommy Blake, 65, Bailey Schneider, 32, a radio and television presenter, with Sarah Ravenhill, 56, who formerly ran her own tourism business, and Candice Bresler, 29, a public relations executive, with former restaurateur, Michael Olivier, 69.
On a shopping trip with Blake and his wife Sakina, Sakina told Jappie that when she started buying ostrich steak 20 years ago, it cost R6.99 a kilogram. It now costs over R60 a kilogram.
“This exercise made me starkly aware of the cost of living and the impact of rising inflation. My immediate thoughts are: what will the cost of food be in my retirement, and will I have saved enough to sustain my standard of living?” Jappie writes in an Instagram post.
Inflation is an important factor to consider when you plan your retirement, but you need to focus less on how many times the cost of your grocery basket will increase over your working life, and more on how your savings match your retirement needs and grow at an inflationbeating return.
The earlier you start to save, the better your chances are of your savings meeting your retirement needs.
As you save for retirement, your aim should be to save enough to generate a decent income, and you will typically achieve this by targeting a certain income replacement ratio, which is your pension as a percentage of your final salary.
Employer-sponsored retirement funds aim for target income replacement ratios of between 60 and 80 percent if you save for between 30 and 40 years. But there are problems with these targets, and self-employed people need to create their own targets. For these reasons, you should regularly check that what you are saving (your contributions) and the growth on your savings are on track to deliver your income needs in retirement.
Here are the things you, or your financial adviser, should regularly check and consider:
◆ What percentage of your income you will need to live on in retirement. Give some thought to:
❑ What you want to do in retirement (see “Retirement can be fun”); ❑ Your potential medical needs; ❑ Who you will be supporting. The younger #FutureFWD participants discovered that retirees often support dependants – Ravenhill supports a sister with Down’s syndrome and Blake supports his 95year-old mother.
◆ How your retirement income will increase. Considering how long you may live, especially with increasing longevity, your income must at least keep up with inflation. Providing for an income that increases with inflation will require more savings than providing for a level income. The inflation you experience in retirement will differ from that which you experience as a working South African (see below).
◆ What you will accumulate at your current savings rate. Check that your savings returns are beating inflation by a sufficient margin.
◆ The income your savings will provide at retirement. If you are not on track, there are only three things you can do to improve matters: ❑ Save more; ❑ Save for longer (delay your retirement); or
❑ Take more risk by exposing your savings to a higher level of growth assets, such as listed equities. But bear in mind your own tolerance for risk, the prudential guidelines in the Pension Funds Act for retirement savings (Regulation 28) and the fact that exposure to higher-risk assets is a long-term strategy and may work against you in the short term.
The inflation you are exposed to in retirement may differ from that in your working life. According to Glacier, the reasons are:
◆ The older you are, the more comprehensive your medical cover needs to be. Comprehensive cover costs more, will consume a larger portion of your budget and will increase each year at a higher rate than inflation – on average, four percentage points above inflation.
◆ You may be less affected by transportation costs, as you are unlikely to commute as much as someone who is working.
◆ You may be less affected by the prices of electronic goods, takeaway foods and other luxuries, as pensioners typically spend less on these goods.
◆ You should ideally have paid off your home loan and vehicle and other asset finance, which means you shouldn’t be exposed to changes in lending rates.
◆ As a pensioner, you will most likely spend a larger portion of your budget on electricity – and be affected by increases in energy costs. ◆ Go to www.glacier.co.za/personal /retirement for more on the #FutureFWD campaign and for links to the participants’ blog sites.