With October being Seniors’ Month, Absa’s Johan Gouws offers advice relating to retirement planning – especially for those on the road towards retirement.
Most South African financial consumers are concerned about the extent to which they are financially prepared for retirement. Becoming dependant on others for financial support and having to adjust the standard of living they have become accustomed to, are the main concerns. These genuine concerns, however, do not necessarily lead to the required financial behaviour.
Industry research shows that less than 10% of retirees achieve a position of complete financial independence. Most retirees are dependent on government, the community and/or family and friends for additional financial support to a greater or lesser extent. Many reasons exist for the current retirement planning crisis in South Africa. A weak savings culture has seen the average household savings as a percentage of Gross Domestic Product drop from around 5% in the 1980’s to negative numbers in recent years. The increase in the cost of living has been eroding the ability of financial consumers to save as their disposable income has declined.
Increased levels of unemployment and lower remuneration increases have prevented consumers from improving their ability to save in recent years. An over-reliance on property as a savings vehicle has left many investors with an illiquid asset on which their income has been declining. The economic recession has not only negatively impacted on house prices but has also resulted in an increase in rental defaults.
South Africans are generally lifestyle-orientated and are willing to take on debt in order to finance luxury expenses. Lifestyle expenditure together with a change in demographics has resulted in debt as a percentage of disposable income rising rapidly from around 50% in 2002 to close to 80% today.
After paying off debt, very little money is left for savings and investment purposes. Increased longevity also means that people will live between 20 and 30 years after entering retirement, which puts additional demands on the capital accumulated at retirement.
Although the challenges for South African financial consumers are very real, a change in the approach to preparing for retirement can achieve the desired results. One of the key requirements is to change the view of retirement as a once-off event that will be happening sometime in the future. Viewing retirement in this way results in consumers having a too casual approach when having to make the necessary provision in the form of retirement capital. The result is that no definitive goals or objectives are set in ensuring that financial independence at retirement becomes a reality.
Any well structured investment plan starts with a clear objective and timeframe. An appropriate investment strategy then needs to be designed and implemented with the assistance of a qualified and experienced financial planner. It is important that the investment plan is at least reviewed on an annual basis. This will ensure that the plan remains relevant and that it reflects the current financial realities and needs of the individual.
Developing an appropriate investment strategy for each life stage is a critical ingredient in ensuring that the money saved and invested for retirement, works for as hard and as long as possible. This will ensure that sufficient capital is accumulated in order to provide the necessary income during retirement.
During the active work years, the main investment objective should be that of wealth creation in order to build up a retirement capital pool for income purposes during retirement. This will require a more aggressive investment strategy with a greater allocation of the investment to shares which has proven its ability to beat inflation over time. Given the 30 to 40 years time horizon involved, an investor can afford to take on the necessary investment portfolio risk required to achieve returns above inflation as time smoothes out the impact of market movements. A spread of the investment across different asset classes such as property, bonds and cash will also contribute towards avoiding the potential loss of retirement capital. Beating inflation will ensure that the purchasing power of the retirement capital is protected in real terms.
As one moves closer to retirement, the amount of portfolio risk that can be assumed becomes less as the timeframe towards retirement becomes shorter and the ability to afford any capital losses is reduced. Many investors, however, become too conservative with their investment at retirement even though they will typically still have 20 to 25 years to invest after entering retirement. It is, therefore, appropriate to follow a smoothed transition process into retirement based on the life-stage investment approach. This approach will avoid risks relating to market timing and not taking sufficient risk to protect retirement capital, and therefore income, against the constant erosion caused by inflation.
Following a life-stage approach will ensure that investors are clear about what returns they should target and the appropriate portfolio risk that they can afford during each life stage. Applying a life stage approach also lessens the risk of investors abandoning their long term strategy as a clear and consistent path is established on the route to financial independence at retirement.
Retirement is not an event but a process that requires a specific objective, a well thought through investment strategy and a regular review. It should, however, be recognised that retirement planning is only part of a broader financial landscape which includes your risk, insurance and your estate planning needs. Retirement planning should therefore not be done in isolation to these other key elements of financial planning.
Johan Gouws is the Executive Director at Absa Investment Management Services
