Your current income should dictate your income in retirement

MOST South Africans don’t know how much money they will need in retirement. The World Bank reports that less than 6% of South Africans will be able to maintain their standard of living in retirement. The rest will have to reduce their standard of living and possibly become a financial burden on their families and the government.

The results of the FinScope South Africa 2016 Survey on Financial Inclusion show that saving and investment have stagnated in the country. Only 18% of adults are saving for the long term, 12% are saving for the medium term, while only 8% are saving for the short term.

Although these statistics don’t provide a true reflection of retirement saving and investments, they do paint a bleak picture of the savings and investment culture in South Africa. For many, the prospect of retirement may feel a long way off, and the associated need to start saving seems less urgent.

However, it is important to remember that, although you may retire from full-time work, you will still need an income to maintain your lifestyle.

Your current income should dictate your income at retirement. In the past, when all employees received a pension from their employees, they would receive 70% or 80% of their final salary. Retirement savings and investments were calculated according to the individual’s income.

Unfortunately, the focus has turned to saving for a lump sum, while neglecting the importance of earning an income too.

People nearing retirement don’t always realise that their current income should dictate the amount of money they should be aiming for when they retire.

When your retirement annuity or pension fund matures, you are permitted to take only one-third of your retirement capital in cash. You must use the remaining two-thirds to buy an annuity that will provide you with a monthly income. Since this amount is only two-thirds of your total retirement savings, you might find that your income in retirement is inadequate.

You should create a financial buffer to protect your retirement income from volatility and inflation.

Retirees don’t always factor inflation and market volatility into their retirement planning. The economy and general market conditions can have a negative impact on your retirement investments. Inflation will contribute to your income goal increasing over time and market volatility will affect the value of your savings and, as a result, the benefit that they can produce.

A client who invests only in cash, where the volatility is very low, will probably have a worse outcome over the long term than a client in a portfolio that can produce returns ahead of inflation, even if the portfolio is volatile.

You should look for a retirement- planning solution that guarantees income at retirement no matter what the market does.

It is also important to remember that, when you retire, you’ll need to pay tax on your investments. So in addition to your regular retirement savings, you should find a tax-efficient retirement investment that can help you to save extra amounts for retirement.

Financial advisers have a crucial role to play in sourcing and providing the best retirement solutions that meet the needs of investors. Speak to an adviser to assess your current needs and implement a retirement plan that will give you the best chance of success when you stop working. Mark Lapedus is the divisional director for product development at Liberty.