Em­power your­self: track your re­tire­ment in­come

Weekend Argus (Saturday Edition) - - GOODPOSTER -

Scary cal­cu­la­tions show­ing that achiev­ing a re­tire­ment in­come of 75 per­cent of your pre-re­tire­ment pay is im­pos­si­ble can make saving for re­tire­ment seem fu­tile.

But, as An­drew Dav­i­son, the head of im­ple­mented con­sult­ing at Old Mu­tual Cor­po­rate, says, tak­ing con­trol of your fi­nan­cial fu­ture is the first step on the road to fi­nan­cial se­cu­rity.

In an ar­ti­cle in Col­lec­tive Wis­dom, a pub­li­ca­tion in­cluded in Fin­week mag­a­zine, Dav­i­son says mes­sages that are in­tended to scare us into bet­ter fi­nan­cial habits can be­come neg­a­tive re­in­force­ment or frighten us into do­ing noth­ing. For ex­am­ple, we are con­stantly told that we don’t save enough, make bad fi­nan­cial choices, bor­row too much, don’t pre­serve our sav­ings when we change jobs, switch in­vest­ments at the wrong time, driven by fear and greed, or are un­der­in­sured on ev­ery­thing from our golf clubs and jew­ellery to our own lives, he says.

To achieve fi­nan­cial se­cu­rity, you have to ed­u­cate your­self, be aware of changes in your cir­cum­stances, and ex­er­cise re­straint, he says.

Colour­field ac­tu­ary Shaun Levitan says your re­tire­ment fund can help you by pro­vid­ing you with an an­nual ben­e­fit state­ment that shows the in­come you are on track to re­ceive in re­tire­ment and not just your to­tal sav­ings or fund credit. Show­ing you only your fund credit is like show­ing you a bank state­ment and can pro­mote wrong think­ing and even bad be­hav­iour on your part, Levitan says.

In a pa­per writ­ten with Har­vard pro­fes­sor Robert Mer­ton for the Ac­tu­ar­ial So­ci­ety of South Africa’s con­fer­ence later this month, Levitan gives the ex­am­ple of Lindiwe, aged 55, who re­ceives a state­ment say­ing she has R1 mil­lion in her re­tire­ment fund.

“Lindiwe is thrilled to have R1 mil­lion in her ac­count. She be­lieves she is on track for a great re­tire­ment. This is largely based on her per­cep­tion that R1 mil­lion is lot of money. The re­al­ity is that her ac­count bal­ance does not pro­vide Lindiwe with any insight into her likely stan­dard of liv­ing in re­tire­ment. She has a po­ten­tially false sense of com­fort over her re­tire­ment pro­vi­sion,” he says.

Lindiwe, like most mem­bers, is un­able to de­ter­mine whether the amount in her fund will be suf­fi­cient for her to main­tain her cur­rent stan­dard of liv­ing in re­tire­ment.

In­stead, Lindiwe should re­ceive a state­ment show­ing that her sav­ings are suf­fi­cient to pro­vide her with a pen­sion in to­day’s val­ues of R6 100 a month in­creas­ing with in­fla­tion and guar­an­teed for the rest of her life. Her fu­ture con­tri­bu­tions un­til her re­tire­ment age of 65 are likely to re­sult in her hav­ing a fur­ther R1 100 a month (in to­day’s rands) as a pen­sion in­creas­ing with in­fla­tion (that is, a to­tal of R7 200). Now, Lindiwe is in a po­si­tion to de­cide whether or not this in­come is suf­fi­cient.

If Lindiwe tells her fund she needs R8 000 a month in re­tire­ment, her fu­ture state­ments will re­flect that she has saved only 90 per­cent of her goal in­come.

Her state­ment could also pro­vide her with in­for­ma­tion show­ing the im­pact on her fu­ture pen­sion if she in­creases her con­tri­bu­tion rate or de­lays her re­tire­ment date.

Her fund could also pro­vide her with an op­tion to ad­just her ex­po­sure to growth as­sets in or­der to help her to reach her in­come goal.

Levitan says this in­for­ma­tion would em­power Lindiwe to con­sider her op­tions and would re­duce the temp­ta­tion Lindiwe may have to ac­cess her “pot of money” be­fore re­tire­ment.

“Be­fore spend­ing mil­lions of rands and hun­dreds of hours on ed­u­cat­ing mem­bers about fi­nan­cial con­cepts, we should try to in­ter­act with them mean­ing­fully. Mem­bers understand in­for­ma­tion when it is pre­sented to them in a way they al­ready think. Com­mu­ni­ca­tion in this way re­in­forces that our re­tire­ment funds are to pro­vide for our re­tire­ment and that they shouldn’t be treated in the same way as a bank ac­count,” Levitan says.

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