If only 6% of South Africans at 65 end up with sufficient capital to retire, then retirement is an illusion for the remaining 94%.
So what are our options?
Carry on working as long as your health permits. This is the only real solution for many people. The ideal space to be in would be a business that you create for yourself doing something that you are passionate about and generate an income from. The big risks are your health and the viability of your business.
Compromise on your life style
The higher your standard of living the more provisions you need to maintain yourself. Cutting back to a more modest lifestyle will spread your provisions that much further. This will also create less pressure to produce the monthly income required if you carry on working.
Depend on your family
The problem is that families are under financial pressure to make ends meet and an extra dependent will add to the pressure. Could be a measure of last resort.
Depend on the state
No much to look forward to from a state pension. Will have to be used in all probability to subsidise your situation if you are dependent on family.
Reinvent your self to escape the paradigm of retirement. Just because your pension fund made you retire at age 65 it doesn’t mean that you have to listen.
If you are prepared to think outside of conventional thinking and plan and prepare in advance your life can begin at 65. Or even before it…
Getting set in your new found business long before the event will give you the advantage of looking past retirement and into a new chapter of your life.
A recent example I have worked with is a client who left her company after 32 years and decided she would not retire but instead preserve her pension an reinvent herself.
She has a very benevolence nature and likes to help the elderly. So she bought a property and renovated it into 8 rooms creating a facility for semi frail people. She outsourced her meals requirements and contracted some nurses. She offers a quality service to her patients with individual attention and social interaction. She charges a premium for this which comfortable covers her costs and provides a sustainable monthly income for her as well.
Her pension benefits are left to grow for some date in the future.
If you put your mind to it there are many possibilities. Will take courage and hard work which may be a far better payoff than struggling on a dwindling pension throughout your retirement.
Inflation discounts the value of your money over time.
The official inflation rate or CPI is an average rate of price movements based on a set weighted basket of goods and services over time.
The average rate points to how your value of you money is discounting over a period.
The higher the rate persists then the less you money will be worth into the future.
Advice fees either improve or erode value of your money over time.
If your financial advisor is adding value your financial planning through qualifications, knowledge and experience which in turn translates into delivery of your expectations then the fees you pay are worth it.
If you can do everything yourself then you can save the fees. so it depends on how much you are prepared to do on your own.
Admin fees are charged by service providers and they vary according to the functionality and service that they provide. These fees will affect the value of your money over time.
Many providers off a sliding scale of fees based on the total value of your investments made with the provider.
Fund management fees will erode the value of your money depending how successful the fund outperforms its benchmark.
If there is no outperformance greater than the fees over the performance of the bench mark then you would be better off investing in the benchmark directly.
For example, an equity fund managers may choose the Satrix Top 40 as its benchmark and charge a management fee of 2%. The charge of Satrix is bout 1% per annum, so the fund will have to outperform it by at least 1% just to break even. Many funds don’t manage to do this consistently over time.
Tax will erode the value of your money over time.
One of the mostly ignore aspects about investments is the various taxes that are applied to them.
Endowment policies are taxed at a flat rate depend ending on the the entity that owns it.
In the case of an individual, the rate is 30% on all interest earned from bonds and cash which are derived from the various funds that you choose.
Dividend are taxed at a flat rate of 15%.
Capital gains tax is also applied to all investments once you dispose of them.
The cost of debt is an opportunity cost.
The longer you stay in debt the more interest you will keep on paying your creditors. The quicker you pay off your debt the sooner you will be able to divert the interest payments to investments which can
increase your wealth and lead to away from decency on institutions to your own financial independence.
The exception is when one borrows to invest in an asset at a lower rate than it appreciates by such as a property.
Conversely, why cars are not investments.
Compounding catapults the value of money into the future provided the net return is above the prevailing inflation rate.
The magical effect of interest on interest compounding over time is where your money greatly appreciates in value. The highest net returns that you can achieve over the longest period of time will
provide phenomenal returns on your investment.
What is the best investment for you? Is there such a thing as best? How do you go about choosing one?
Best is only found in the rear view mirror. Therefore best is only known when you’ve passed it and you can look behind. So best cannot be predicted into the future. The way forward should rather be determined by what is appropriate for you and your circumstances. This often is more about investing appropriately according to your lifestyle needs taking your risk profile into account, rather than setting out to chase the highest returns.
For example, someone who has a few years to retirement should not be 100% exposed to shares as there is a considerable downside risk of losing capital which should be there to provide for income.
At the same time, someone in their mid 30’s wishing to build up capital over 10 years will probably do well to save monthly into shares through a unit trust or exchange traded funds.
This points to realistic expectations measured against ones circumstances. A function of financial planning.
Some ideas on how to mange ones expectations and plan appropriately.
It’s all about risk verses returns. A successful plan is not based on the highest returns achievable. In fact you may be exposed to far too much risk relative to your situation if your returns are too high. High returns do payoff more times over the long term but in the short term they sometimes don’t. This is why we advocate shares for the long term.
Therefore the plan is all about appropriateness. Where are you now in relation to where you want to be financially.
As a rule of thumb
Short term 3 years – conservative
To protect capital and beat current interest rates after tax as well as keep up with inflation.
Money market, bonds, capital protection investments, segregated funds
Medium term 5 years – moderate
Diversification across all asset classes to beat inflation by 3% after tax and fees
Unit trust balanced funds,
Long term 10 years – assertive
Optimum exposure to equities to beat inflation by 6% after tax and fees
Unit trust equity funds, Exchange Traded Funds, shares,