Retirement planning reimagined
Calculations. Estimates. Probabilities. Gloomy reports with the latest statistics.
These are the aspects with which financial planners and clients are bombarded daily on the topic of retirement planning. But years of study, training and the use of sophisticated financial planning software do not prepare us for responsible retirement planning in the same way as listening to the realities faced by parents, in-laws, uncles, aunts and neighbours, does. Too often these days one is confronted with the experiences of ordinary people, who saved diligently for years in their employers’ retirement funds, also had a retirement annuity (most likely with a contribution stuck on R1 750 per annum!) and were looking forward to the utopian retirement years, but are now living a reality never imagined. Retirement has become something to fear and many retirees’ days are filled with worry and anxiety.
So perhaps it is time to reimagine retirement planning for the majority of South Africans.
MAIN MYTH: Retirement planning is about saving enough money pre-retirement to meet your retirement goals.
One does not need Einstein’s mathematical abilities to realise that not even the magic wand of compound interest can deliver a retirement modelled on the lifestyle achieved by the end of our working careers and spanning 35 years (age 55–90) thereafter, exclusively with money saved over a 30-year career (age 25–55). We start our careers with entry-level salaries and we live basic lives. Then we work hard, get promoted and improve our lives. We buy bigger houses, drive better cars and are driven to live in the moment by our talented children who crave opportunities. And as responsible people, we save for tomorrow in a retirement fund or two.
Then we arrive at retirement with lifestyle expectations nurtured over 30 years … and suddenly the sums do not add up. If we need to save X to enjoy a retirement of Y and we have realised that it is impossible to reach X with savings alone, then surely Y becomes the focus of attention?
REIMAGINED: Retirement planning is about managing your retirement goals pre-retirement.
This is, of course, not an argument not to save.
Retirement savings are a given. But if we can assist clients to lower the amount that needs to be generated from savings without affecting their overall standard of living negatively, we can help them meet the real goal of a carefree retirement. We need to think innovatively along these lines:
Firstly, more items need to be pre-funded. Increased medical expenses after retirement are a reality. Clients who are serious about a carefree retirement need to consider establishing a savings fund for this purpose pre-retirement so that the effects of compound interest can be harnessed. Furthermore, clients need to confront their other life goals and dreams early enough to plan ahead. Here the client has one of only two choices: manage savings or manage expectations. If the client wants to fund tertiary education or a memorable wedding for their children, for example, he/she needs to allocate savings to these goals. If the client protests that his/her income is already under pressure and that a wedding fund is merely a pipedream, it will be the challenging task of the financial planner to explain empathetically that expectations need to be managed in time, as retirement savings cannot sustain other unaffordable goals. That is why I believe that good financial planners will continue to thrive despite the advent of robo-advisers – there is so much more to good financial planning than numbers and money!
Secondly, we have to encourage our clients to think about ways to lower their post-retirement income requirements without lowering their quality of life. Is this possible? It is, if we focus on the so-called “hidden expenses” in our budget. Retirees should consider aspects such as municipal levies, rates, taxes and proximity to general amenities, etc. when deciding where to live after retirement. These costs can erode pension income without necessarily delivering a better life. The same principles apply to an unused swimming pool or a large garden, if gardening is not a passion. Each expense of the post-retirement budget needs to be weighed up and prioritised according to the quality-of-life measure added.
Finally, an important part of reimagining retirement planning involves the addition of income NOT derived from pre-retirement savings. The time has come to think of other income post-retirement as a non-negotiable. Does this mean we all have to continue working until work is no longer an option? Absolutely not! Intentionally buying a post-retirement property with a small granny flat that can be rented out also ticks this block. As does baking for a local home industry, or welding security fencing. As a working mom, I cannot tell you how grateful I am for having a retired friend I can phone at short notice to pick up a child who finished early. And for my friend, this provides handy pocket-money for luxuries she cannot afford off her pension. Successful retirees and exemplary financial planners intentionally and creatively plot income-generating activities into carefully crafted retirement plans!
NO MYTH: Retirement planning is all about planning.
In conclusion, we need to realise that retirement planning is most definitely all about planning – lifelong planning that uses savings as only one of the key ingredients in the plan.
Retirement planning is principally about determining our life goals in order to align our resource allocation accordingly, whether these goals are imminent or seemingly remote. Financial planners of the 21st century will require creativity to think differently about their clients’ complex financial dilemmas.
Executive Dean – Milpark Education
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07 Aug 2019