More than 70% of South Africans, particularly in their 20s and 30s, cash in their retirement savings when they change jobs, severely hampering their ability to retire financially independent. Then, in their forties, they begin to think about the future and realise they've made a substantial error in judgment.
According to Allan Gray, all is not lost. Jeanette Marais, deputy director of distribution and client services, says that while starting as early as possible is vital, it's still possible to make provision for your retirement starting at 45. "It's not only necessary, it's imperative," she says. But you'll have to save harder, work for longer, and invest wisely so that what savings you do have, achieve the best possible returns.
Ultimately your retirement income will be a factor of how early you started saving, how much you've saved, the investment returns you've enjoyed and the amount lost through not preserving your pension or provident fund savings when you changed jobs. When you reach 45, you can only influence two factors: how much you contribute and the investment choices you make. It's too late to think about starting early, and the retirement money you cashed in between jobs is long gone.
Marais says the rule of thumb for retiring independently is that you will need a capital sum of 15-20 times your final annual pre-tax income. This will give you an income equal to about 70% of your income at a retirement age of 65 (if you buy a conventional annuity with 5% escalation at retirement).
To achieve this you would have to save 10% of your salary from age 25. This is based on the assumption that inflation over the period averages 6%, your salary increases average 7%, and your investments achieve a real (i.e. above inflation) return of 5%.
If you start at 45, the picture is quite different. To achieve the same level of income (70% of final salary), you now need to save approximately 30% of your salary or achieve an investment return of 15% above inflation. Both seem daunting. But if you can achieve an investment return of 7% above inflation (i.e. just 2% more than in the example above), you'll have to save 25% of your salary. And if you work until 70 instead of 65 and earn a regular return of 7%, you'll only have to save 12% of your salary.
"There are ways to lessen the burden," says Marais. One of these is to plan to retire on 50% of your current income instead of 70%, which is possible if you're debt free and in good health. "If your home is paid up, and you've looked after your health, you'll need less income after retirement," she says.
From an investment perspective, you can't afford to be too conservative at 45. If you are, you won't achieve the necessary returns, Marais says. Using the same assumptions as above, but achieving investment returns that just match inflation by investing conservatively will leave you much worse off with an income of about 25% of your final salary.
"Equities have out-performed all other asset classes over time and it is essential to include them in your portfolio if you need real growth," says Marais. However, they also come with volatility; though this tends to smooth out over the long term.
Deciding what percentage of your capital to invest in the different asset classes is tricky, so Marais suggests an asset allocation fund as an intelligent choice for most investors. "With an asset allocation fund, such as a balanced fund, the experts actively determine the mix of bonds, cash, equities and property in your portfolio on an ongoing basis depending on market conditions, something the average investor is ill-equipped to do."
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