In the first of a series of articles on the recent Personal Finance/Old Mutual Retire Right seminars, Bruce Cameron reports on the effect that inflation is having on your retirement savings.
Inflation remains the number-one enemy of a financially sound retirement, Rian le Roux, the head of economic research at Old Mutual Asset Managers, says.
Le Roux told the Personal Finance/ Old Mutual Retire Right seminars earlier this month that the effects of inflation on a financially secure retirement have been exacerbated, until recently, by increasing taxation, declining personal savings, recent poor investment returns and people retiring earlier and living longer.
In 1964 South Africans, on average, saved more than 12 percent of their after-tax earnings. Now we save less that 0.5 percent. This has been compounded by the fact that most South Africans' real income, after tax and the effect of inflation have been deducted, has not on average increased. Since 1967, on average, the percentage of the amount of tax paid from annual income has risen from just under seven percent to 14 percent.
Since 1996, investment markets have in many cases provided negative returns with, for example, the JSE financial industrial index providing a negative 1.6 percent after inflation.
Le Roux says if you do not save from the time you start earning and then retire early, you cannot expect to have a financially secure retirement. Individuals have to make a conscious effort to save more money if they are to withstand inflation and poor investment performance.
With inflation currently in the region of seven percent and assuming it stays at the same level, the real value of R10 000 will shrink by 65 percent to R3 500 in 15 years and by 83 percent to R1 700 over 25 years. At a 10 percent inflation rate, the real value of R10 000 will shrink by 80 percent to R2 000 in 15 years and by 93 percent to R700 in 25 years.
As a pensioner wishing to sustain an income of R10 000 a month, you will need capital of R1.5 million (assuming 10 percent investment returns and current tax rates). With an inflation rate of seven percent, to sustain your standard of living, your income will have to grow to R28 000 in 15 years and R57 000 in 25 years. This means your capital will have to increase to R4.2 million over 15 years and to R8.5 million over 25 years.
With an inflation rate of 10 percent, to sustain your standard of living, your current income of R10 000 a month will have to grow to R44 000 in 15 years and R120 000 in 25 years. This means your capital will have to increase to R6.6 million over 15 years and to R18 million over 25 years.
Le Roux says that you must realise that nobody else cares about your retirement. Employers are no longer willing to bear the burden of caring for pensioners. This was one of the main reasons why employers had encouraged employees to move from defined-benefit funds, where the risk lies with the employer, to defined-contribution funds, where the risk for a financially secure retirement lies with the employee. The government also faces too many other demands to provide meaningful old age benefits.
The biggest risks for all pensioners is that they save too little before retirement and that inflation will come streaming back, Le Roux says.
"Only early saving and proper planning can ensure a fairly care-free retirement. You must accumulate sufficient assets before you retire. This accumulation is a function of how much you save and the after-tax investment returns on your savings."
Le Roux says it is important in planning for retirement that your financial adviser shows you the impact of different scenarios, particularly different inflation rates, on your retirement plans.
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