As many as 94% of South Africans will not retire with enough money saved to maintain their lifestyle. In other words, 94% of us will be poorer in retirement than we are now. This is not always because they don’t plan. Often it comes down to poor planning.
Too often retirement savers go to brokers and advisors to create a retirement plan and work out what they need to save, only to realise a few years down the line that they are nowhere near achieving their retirement goal. There are a variety of reasons why outcomes fall short of projections. Often these reasons combine, compounding the shortfall. Projections from brokers and advisers, or even from calculators on websites, can be out of sync with reality for a number of reasons, including:
Retirement age:
Gone are the days when everybody expected to retire at 60 or 65 (and hoped for 55). Many of us will need to keep working until the official retirement age. But, as many people are finding now in these straitened times, early retirement is not always a choice. Even if you are still doing a reasonable job and your colleagues appreciate your experience and wisdom, when employers are obliged to reduce head-count they often look to those approaching retirement. This is a double whammy as you not only miss out on a few extra years of saving and investment returns, but you will also depend on those savings for longer.
Thinking incorrectly about inflation:
Inflation is an important consideration for retirement saving because it affects the purchasing power of your money over time. However, it is impossible to predict future inflation with any kind of certainty. The danger lies in setting a savings goal that appears adequate by today’s standards yet making assumptions on investment returns that include inflationary growth. You will find that you achieve your nominal savings goal quite easily but, once you adjust for inflation, you fall far short of the money you actually need to preserve your lifestyle in retirement.
One way to avoid this disappointment is to work in current money terms only.
In other words, set a savings goal based on how much money you would need today to retire, and then devise a retirement savings plan that ignores inflationary salary increases and the inflationary component of investment returns.
Underestimating your required income:
Many living expenses reduce as we get older. You will pay a lower average tax rate once you are living off reduced (annuity) income; you will no longer be saving for retirement; your bond payments should be proportionately less than when you bought your property or, ideally, you should not have any bond repayments anymore; and any children will hopefully be supporting themselves. Work-related expenses, from wardrobe to transport, will be reduced.
But you will have more free time on your hands, which can be expensive. Also, some outlays, such as for medical treatment, tend to increase both in quantity and price as we get older.
There is no point hoping that 30 or 40% of your current earnings will cover your lifestyle. The 10X retirement calculator uses a base income replacement ratio of 60% of final salary, but allows the user to adjust that according to their own circumstances.
Exaggerated performance:
Although the range of realised investment returns for different asset classes is quite narrow over the long-term, once we adjust for inflation, it tends to be much wider over short periods. Projecting long-term returns based on a few good years, or generally just projecting unrealistic returns, will likely end in much lower savings than planned. To avoid disappointment, err on the side of caution in your return assumptions, and rather make up the difference by saving a bit more, and reducing your investment costs.
Calculations don’t include all fees:
Advisers and retirement calculators often rely on average historical asset class returns to project a portfolio’s future return. However, they often fail to consider tha, for investors, these returns are reduced by investment fees. An additional 2% fee p.a. over 30 or 40 years would reduce your savings outcome by between 40% and 60%. This would be bad enough if you were paying just 2% but most South Africans pay significantly more. According to a Treasury estimate, the average fees paid by South African retirement savers is 3% of the total value of their savings per year.
It may be the case that some of the fees, say management and platform fees, are factored into projections, but not all. The adviser might add another 1%, which can make all the difference.
The 10X Investments retirement saving calculator, which is free to use online, empowers retirement investors to take their future into their own hands. It factors in fees, so you don’t fall 40% to 60% short of your retirement goal. There is an option to select a below-average return to answer that worrisome question of, “What if markets don’t perform well enough?” It gives you the flexibility to continuously review if you are on track to retiring with dignity.
Michael Rossouw is a senior Investment Consultant at 10X Investments.