It is widely accepted financial wisdom that when it comes to planning for retirement, it is best to start saving early and save right through your working life – not just so that you put away more money, but so that you may reap the rewards from compound growth as your returns are reinvested.
However, for a number of reasons, many of us find ourselves getting close to an age where we would like to – or have to – retire, without a retirement plan.
So what do you do if you find yourself in your late forties or early fifties and you don’t have a proper retirement plan? We found out.
An honest look at your budget
“The shorter your time horizon to retirement, the less you can rely on interest returns to give you what you need in retirement. At this stage, it’s actually more about saving and how much you put away because you’ve left it so late,” says Lindsay Frost, a Cape Town-based investment planner and financial advisor.
A good exercise is to first sit down and go through your monthly costs and understand exactly what you’re spending your money on every month. If you’re in a relationship, Frost advises doing this together with your partner. Expenses should be grouped together into categories such as groceries, travel, entertainment, insurance and so on.
“Then you can create a goal for what you need for retirement; the bottom line amount that you will need. Because you’ve left it late, be realistic – don’t expect that you’re going to spend an amazing amount of money; rather work out the worst case scenario.
What is the minimum amount that you need to actually survive in retirement? Start off with that as a goal,” she explains, taking into consideration that you would be planning for some 20 to 30 years of post-retirement income.
Think ahead: inflation and other life changes
Some factors Frost advises to look at when budgeting for life after retirement include a potentially reduced cost of living. For example, if you own property, your bond might be paid off; if you have children, they could potentially be out of the house by then and earning their own income.
Fuel costs might also be reduced when one no longer needs to travel to work every day. “So technically, your spend in retirement should be less than what you’re spending now,” says Frost. However, she advises that healthcare costs might rise.
Once you’ve got the number in your head, the next step is to minimise the accounts you have.
“You might have two current accounts and a savings account, plus two credit cards, which can make it hard to keep track of your spending. And if you have a spouse, what are you spending together? How many accounts do you have between the two of you?
“In South Africa, you can’t have joint accounts. All you can do is have a card to access someone else’s account, thus you will each need your own account.
“To minimise accounts, you could share a credit card account, so that all costs come off one credit card. So you get your salaries in your individual accounts, but you jointly pay off one credit card.
“If you really struggle with discipline, another option is to actually just not have a credit card. Because then you can’t overspend,” explains Frost.
Retirement savings and tax payback
The first thing to look at is a retirement annuity, says Frost, especially if you don’t have a pension fund or provident fund linked to your employer.
Whether you privately invest in a retirement annuity or your employment comes with a provident fund, when you invest in one of those, SARS gives you tax back.
Taking a hypothetical example; say you pay a tax rate of 40% and you invest R1,000 into a retirement annuity: “SARS gives you money back at your tax rate. At a hypothetical 40%, that means you get R400 back. So if you invest the R400 back into the fund, you get nearly R200 back – then once you’ve invested that back in, you’ve invested nearly R1,600, versus the R1,000 you would have invested without the tax benefits of a retirement annuity,” she explains.
However, one can only reap those benefits if the tax is reinvested. That is to say, when you do your annual tax returns and SARS sends the refund, it must be put back into the retirement annuity and not spent.
If possible at one’s place of employment, one could also ask the employer to include your retirement contribution on your payslip so that the tax is reduced immediately on a monthly basis. In this way you could increase your retirement savings to include the monthly tax saving.
Says Frost: “So you’re benefiting on a monthly basis rather than having to exercise the discipline of taking an annual lump sum to invest back into the fund.”
Late start? Go for balance
“If you choose a high risk investment strategy, your investment time horizon to achieve the return objectives is 10 years or more,” says Frost, explaining that you might have one year where you have a minus return on your investment, and perhaps a positive return in another year, and that these are more likely to balance each other out over a decade. Whereas over a short term, they are less likely to have enough time to balance each other out and you might end up losing money.
“Say you’re retiring in five years but you’re only starting to save now… keep in mind that you’re still going to need to draw from that money for possibly 20 to 30 years.
“If you’ve a high-risk strategy and, say, you have a minus 30% on your return in one year, and perhaps you’re drawing 5%, that’s more than a third of your money gone. So ideally, the money that you’re going to spend in the next five years, you want to be a bit more defensively invested, and any money for a longer term can be more aggressively invested,” she explains.
Cryptocurrency and traditional saving accounts
Similarly, she cautions against unregulated investments.
“For 5 years to go it’s almost all about amount saved instead of investment return. In saying that though you don’t want to invest in a high risk investment that is not diversified as there could be a crash on the day you retire. Similarly, you don’t want it all in cash as you won’t beat inflation. The key is to diversify what you are invested in but more importantly just start saving – whether you achieve an 8% return or a 7.5% return materially it’s not going to make a massive impact on how long your capital lasts in retirement. It’s more about how much you save. It’s about being consistent..”
Frost also warns against merely keeping one’s retirement savings in a bank account: “The problem with that is, if all your investments are in cash… if it’s in a bank account, you’re earning interest that’s taxed. So your return after tax is less than inflation most of the time.
“For example, if inflation is at 5% and your interest return is also at 5%, once the interest return has been taxed, it will actually be less than inflation; it could end up then being 4%. In other words, the cost of goods and the cost of living went up by 5%, but your investment only grew by four, so you’ve actually gone backwards by 1%.
“If you compound that over the years, it has a huge impact on your retirement savings.”
It’s even worse for people who might choose not to even put money in the bank, perhaps keeping it in cold, hard cash: “You aren’t getting any return. In South Africa, inflation has historically been between 4% and 6%, so you’d actually be going backwards every year.”
Your house is not a retirement plan
“A lot of people make the mistake of thinking of their house as a retirement plan,” says Frost. She cautions against this kind of thinking, explaining that you will always need somewhere to live and therefore that capital will be tied up in a physical asset that you live in.
“Maybe you think you could sell your house and downscale, but that’s still going to cost you money… you’re not going to realise all that capital; you’re going to have to use some of it for where you’re going to live. And in our experience, there are very few clients who have actually been able to invest money from downscaling… as for the rest, they spend exactly what they sell for.
“When you downscale, there are also moving costs and capital gains tax and agent’s fees, and there are possibly new pieces of furniture you might have to buy for your new home. There are all these extra costs that one might not think about.
“A big pitfall is thinking that one’s house is their retirement plan – it’s not. Your home is not your investment. You’re always going to need that capital on a home,” says Frost.
To illustrate her point, she says a homeowner might imagine that they could sell their property for five million and buy another for three million, “so they think they’re going to realise two million, but after capital gains tax, agency and moving costs, they may only see a number closer to one million.”
Even for those who might own property with potential for rental income, she warns against depending entirely on that, as unforeseen events such as the pandemic could affect a regular rental income.
Frost said “if that’s the only thing you’ve invested in, you’ve also got all your eggs in one basket. You’re 100% in South Africa and 100% in residential property. You haven’t diversified your investment portfolio, which is highly risky.”
Benefits of delaying retirement by a few more years
“You’ve got to start somewhere, and if you’ve left it too late, accept that you’re not going to start on Day One with exactly what you can afford to save… it’s going to take time. It might require you working two jobs,” says Frost.
“It might even require you working until 70 instead of 65. That makes a huge difference to people’s retirement accounts.”
She explains that delaying retirement by five years means that you’re spending five years less from your savings, and therefore have five years more to save: “So it’s actually like a 10-year benefit by delaying retirement by five years. It has a huge and even bigger impact than your investment return when the time horizon is so short.
“So if you can delay retirement and if you can get another job just to boost savings, it will make an enormous difference.”
However, even with all of that, she strongly advises that one finds a financial planner to kick off the process: “Just verbalising and setting down goals increases the probability of achieving them.” DM/ML
