Most of us know that retirement planning is best commenced early. However, there are some common misconceptions that can affect the planning process. We asked investment and insurance experts to debunk the three most pervasive of these.
Brad Toerien, former CEO of FMI, says, “We tend to put risk and investment planning into separate boxes when, in reality, they do the same thing.
“Risk planning is about protecting yourself from the financial consequences of possible misfortune, so that you are able to accumulate wealth. Investment planning is about protecting and increasing that wealth so that you can continue to earn an income when retired.
“In many ways, they’re both about protecting your income,” says Toerien.
Myth 1: I will have a steady income until I retire
This myth asserts that you will earn a continuous, ever-increasing stream of income until retirement. However, job insecurity, injury or illness could render you incapable of working, and/or interrupt your income.
Pieter Wasserfall, sales and retention manager at Intelligent Debt Management, says, “The emergence of Covid-19 has taught us that nothing is certain. You could have a job today and be retrenched tomorrow. Not only are the chances of losing your income high, but there is no way to guarantee that it will increase steadily year-on-year.”
Myth 2: I know exactly how much I need for retirement
In fact, we grossly underestimate how much we need. According to Wasserfall, consumers tend not to take into account the impact of inflation on the cost of living.
“Inflation lowers the value of your investments and savings. For instance, with a 5% inflation rate, the cost of living will have increased by 150% in 30 years. So, the value of your investments and savings will be 150 times less than it is today,” he says.
Myth 3: I will retire at 65 and live until 90
While achieving the age of 90 may be a comforting thought to some, the reality is that most people can’t afford to retire at the age of 65.
Individuals are living longer, healthier lives with a higher life expectancy, which means that post-retirement, money needs to last longer.
Planning for your retirement should begin as soon as you start earning an income, if you want to have any hope of maintaining your current lifestyle. As a rule of thumb, 15% of your monthly income should be saved for retirement within 40 income-earning years prior to the event, 18% if you have 35 years remaining, and 22% if you have 30 years left in which to save.
Consulting an experienced financial adviser will help you plan correctly and avoid the pitfalls and common myths.