Be­ware im­pact of in­fla­tion on retirement costs

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - LAURA DU PREEZ

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.

RETIREMENT IN­FLA­TION

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.

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