Niel Krige, an actuary, was until last year the chief executive and deputy chairperson of Momentum Life. Krige, who also served as a chairperson of the Life Offices' Association, then "retired" to start a new career as a Professor at the University of Stellenbosch Business School. Krige told the recent First National Bank/Personal Finance Successful Retirement seminars that less than 10 percent of South Africans make adequate provision for their retirement. They often compound this folly by retiring when they should continue working to give themselves a purpose in life.
There are 11 reasons why most people do not make adequate provision for their retirement, Niel Krige says.
Krige, whose topic was "Why retirement planning is so necessary", says that as a result, these people will have to delay their retirement date, find another job after they "retire", start a business or dramatically lower their standard of living.
He says the 11 reasons why most people are not financially secure in retirement are:
1. Longevity
Krige says people now spend more years in retirement because people have longer lifespans.
If you are a 60-year-old man, your life expectancy is now 77 years; and if you are a 60-year-old woman, your life expectancy is 83 years.
However, many people do not save enough money to see them through what could be a lengthy retirement.
2. The retirement gap
Krige says you can expect your income to drop when you retire. If you belong to an employer-sponsored pension scheme, you can expect your pensionable income to decrease by at least 25 percent when you retire.
Furthermore, you will lose any non-pension-funding benefits, such as a housing and a car allowance.
3. Healthcare costs
Krige says medical costs are likely to be the single biggest item on your budget, having overtaken home loan repayments. The portion of your budget allocated to paying for healthcare is likely to increase, particularly if you are older than 60.
He says the average person spends 60 percent of his or her entire healthcare costs after the age of 60.
The other healthcare-related factors that eat into your retirement savings include:
- Most employers are either reducing or halting contributions to retired employees' medical schemes;
- The rate of medical inflation is significantly higher than ordinary inflation; and
- Sophisticated treatments prolong your life and your retirement - and are expensive.
4. Changing Jobs
Krige says not preserving your retirement savings when you change jobs is the "single biggest reason for inadequate provision for retirement".
He says instead of preserving the money, many people use the retirement savings they receive when they change jobs to go on holiday or to buy a new car.
People who do this not only lose the money they have saved for retirement, but they also lose out on the massive advantages of compounded investment growth (interest being paid on interest) that you derive by keeping your savings invested.
5. Early retirement/retrenchment
Krige says that taking early retirement has a dangerous double whammy effect on your finances. Firstly, you shorten the period during which you can contribute to your retirement savings. Secondly, you will spend a longer period in retirement. The result is that you have less money that needs to last you longer.
Krige says based on actuarial life expectancy tables, you could double the time you will spend in retirement if you take early retirement at 55.
He says another danger of accepting early retirement packages is that people often use the retirement savings to start new businesses, which then fail.
Krige says there are a number of factors you must take into account when timing your retirement.
These include:
- Loss of future earnings. The earlier you retire, the more certain you need to be that your savings will last until you die. You must accept that you lose the opportunity to increase your retirement savings.
- Reduction of income. You lose fringe benefits and, often, employer contributions to your medical scheme. Your pension will invariably be lower than your salary at retirement. However, some costs may disappear when you retire.
- The best financial years of your life. The last 10 years before retirement is normally a period when you have no dependent children, allowing you to increase your savings.
- Retirement fund benefits. If you belong to a defined benefit fund, there are penalties on early retirement, which can be as high as a six percent reduction for every year before your contractual retirement date. In the case of a defined contribution scheme, you limit the potential end value of your benefit if you retire early.
In both cases, the widow's pension will also be substantially lower.
- The retirement gap. The later you go on retirement, the more likely it is that the gap between your pension and what you are earning will close.
- Loss of group life and disability benefits. Most retirement schemes have group life and disability attached to them and this cover falls away when you retire. This could be a serious blow, particularly if you still have dependants.
You are likely to pay higher premiums if you, as an individual, want to buy an assurance policy that provides the same level of life and disability cover as that provided by your retirement scheme.
- Medical benefits. Medical inflation is high. Many employers do not contribute to retired employees' medical costs, and this results in medical inflation having a larger and larger impact on your budget.
- Ravages of inflation. Inflation is the single biggest threat to pensioners. If you assume a level pension of R10 000 a month and an inflation rate of six percent, the buying power of your pension will reduce to R5 580 after 10 years, to R3 120 after 20 years. and to R1 740 after 30 years.
If the average inflation rate is 10 percent, the buying power of your R10 000 is reduced to R3 850 after 10 years, to R1 490 after 20 years, and to R570 after 30 years.
Krige says that by the time inflation bites, you will probably be in your seventies and unable to do anything to restore your financial position.
- Your level of debt. You should have paid off all your debts by the time you retire. You should postpone your retirement if you have a high level of debt. You will reduce your pension significantly if you use the lump-sum benefit you receive at retirement to pay off your debts.
- Tax considerations. Your income levels can affect any tax concessions at retirement.
- Do you really want to stop working? Krige says this is a major question that many people do not consider. You need to ask yourself what you are going to do after six months of retirement? And after 12 months when you have read all the books you wanted to read and taken that overseas trip.
Krige's advice is that you should continue working as long as possible to give yourself a "purpose in life".
He says it has become increasingly common, both here and abroad, for people to embark on a second career when they "retire".
Krige says you should definitely extend your retirement date if you are short of capital. If this cannot be done, you should take on a post-retirement job or start a business.
If you decide to start a business, you must take precautions so that you do not make your financial situation worse. These precautions include:
- Ensure you have drawn up a robust business plan;
- Ensure you have the skills to manage a business. If not, get the proper training;
- Do not plough all your retirement savings into the business;
- Carefully consider the start-up costs. Do not borrow; and
- Be conservative in your expectations of the income you will receive.
6. Employer payouts
Krige says people who changed jobs in the 1970s and 1980s and who were members of defined benefit pension funds did not receive the full value of their pensions. Instead, they only received their own contributions plus nominal interest. So even if you preserved your retirement savings, you lost out on your employer's contributions and the full investment growth.
7. Starting too late
Krige says starting to save for retirement too late in life is a significant problem, particularly with self-employed people, who tend to put everything into their businesses and leave retirement saving till last.
He says if you leave saving for retirement until the age of 30 and want to retire at 60 with an income equal to 75 percent of your final pensionable income, you will need to save 12 percent of your income every month. If you start saving at age 40 with 60 as your retirement date, you will need to save 20 percent of your income. If you only start saving at 50, you will need to save 48 percent of your income every month.
8. Poor investment decisions
Krige says the downside of defined contribution schemes is that you have to make certain investment decisions. He says many people either do not want to make the decisions, or make the incorrect choices, or receive poor advice from unqualified advisers.
9. HIV/Aids
Krige says as a result of HIV/Aids, an increasing proportion of retirement fund contributions go towards funding death and disability benefits, leaving less for retirement savings. He says you need to make up any reduction in retirement savings or ask your trustees to reduce your group death and disability benefits.
10. Lack of proper planning
Krige says you need to start planning early for retirement. It is never too early to start planning, and you must revise your financial plan regularly.
11. The boomerang generation
Krige says often children are unable to find work and so remain dependent on their parents. Furthermore, many people also have to support elderly parents whose pensions have been ravaged by inflation, or who made inadequate provision for retirement.