We all dream about retiring at an early age and putting the working days behind us as soon as possible to enjoy the remainder of our years comfortably. What do you have in mind? A dream house on the beach or days filled with travelling from one exotic location to another? Or are you content with just the peace of mind that you can afford your necessities without a regular working income? A comfortable retirement requires a lot of planning in the years leading up to it. That brings us to our next question: Do you have a retirement plan in place, and are you on track with your retirement plan if you do? If you’re not on track with your retirement planning, then it’s best to start acting sooner rather than later if you want to enjoy your retirement years. Most South Africans plan to retire as early in life as possible, but the unfortunate reality is that most cannot afford to retire as early as they’d like due to poor planning. Only you are responsible for your retirement plan, and if you’re not on track, now is the time to take charge. Retirement planning is a multistep process that evolves through the years. To have a comfortable, secure (and fun) retirement, you need to build the financial cushion that will fund it all. That leaves us to the planning of how you’ll get there. This week’s newsletter will help guide you in taking charge of your retirement plan.
HOW CAN YOU TAKE CHARGE OF YOUR RETIREMENT PLAN?
Retirement planning starts with thinking about your retirement goals and how long you have to meet them. If you are 30 years old now and plan to retire by the age of 55, you only have 25 years of planning and saving available. Ask yourself:
At what age do I want to retire?
What are my retirement goals?
How many years do I have available before retiring to plan?
Your answers will form the foundation of your retirement plan. Now, you need to look at the types of retirement funds available that can help you raise the money to fund your retirement goals. As you save that money, you have to invest it to enable it to grow.
Below are some helpful steps that everyone should take, no matter what their age, to build a solid retirement plan.
UNDERSTAND YOUR TIME HORIZON
Your current age and expected retirement age form the initial groundwork of an effective retirement plan or strategy. The longer the time you have from today until retirement, the higher the level of risk your portfolio can withstand. In other words, if you are young and have 30-plus years until your retirement, then you can place most of your assets into riskier investments.
Your returns should outpace inflation so you can maintain your power during retirement. Inflation starts small, but over time it can grow significantly.
“We’ve all heard—and want—compound growth on our money,” Says Chris Hammond (a financial advisor). “Well, inflation is like ‘compound anti-growth,’ as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesn’t seem like much each year, but given enough time, it has a huge impact.”
With this said, the older you are and the closer you are to your retirement, you should rather focus your portfolio on capital preservation and less risky securities.
The takeaway? You might not think that saving a few Rands here and there in your 20s means much, but the power of compound interest will make it worth much more by the time you need it. The earlier you start planning for your retirement, the better the quality of your retirement years.
WHAT AGE DO MOST SOUTH AFRICANS RETIRE AT?
The average age of retirement in South Africa for both men and women is 62 years old.
However, this statistic was last recorded in 2020, and a lot has changed since then. Most people cannot retire comfortably at that age based on their pension savings because of the wrath of the COVID-19 pandemic (yes, we mentioned the C-Word after trying hard to avoid the topic). The pandemic has resulted in South Africans tapping into their retirement savings and investments prematurely to make ends meet. During that time, the country also had a dismal track record of saving.
The rough rule of thumb is that for every year you paused your savings or delayed starting your retirement savings plan, you can make up for it by retiring one year later.
DETERMINE YOUR RETIREMENT SPENDING NEEDS
Having realistic expectations about your possible spending needs post-retirement will help you define the required size of the retirement portfolio you need. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent before their retirement years. However, this is typically an unrealistic assumption, especially with the cost of living rising as quickly as it is now. Other considerations also need to be factored in, such as your bond, vehicle repayments, unexpected medical expenses, etc.
When determining your retirement goals, maybe list having your house and car and other expenses settled as retirement goals so they can fall away from your budget in the later years.
Some retirees sometimes spend their first years splurging on travel or other bucket-list goals. It is better to work on an annual expenditure that amounts to 100% of your current spending habits. Let’s not forget that people are living longer lives, so you need to ensure you are saving enough for what could potentially be a long retirement period.
“One of the factors—if not the largest—in the longevity of your retirement portfolio is your withdrawal rate. Having an accurate estimate of what your expenses will be in retirement is so important because it will affect how much you withdraw each year and how you invest your account. If you understate your expenses, you can easily outlive your portfolio. If you overstate your expenses, you can risk not living the type of lifestyle you want in retirement,” says Kevin Michels, CFP, EA, financial planner (Utah).
SAVE! SAVE! SAVE!
Now that you know how long you have left to plan for your retirement, what goals you want to achieve, and how much capital you need to live comfortably throughout your retirement years. You need to determine whether you are saving enough capital every year to tick off all your boxes.
So, if you were to retire at your planned retirement age, how long would your capital last if you were to draw your required income? If your capital won’t last very long, it is a sign that more money should be saved annually. Drawing a financial roadmap is a great way of visually planning your retirement.
Need some help with your financial planning? Contact Wallstreet Financial Services, and one of our professional financial advisors will gladly assist you as you plan your savings journey to financial freedom at retirement.
HOW MUCH SHOULD I SAVE FOR RETIREMENT?
One rule of thumb is to save 15% of your gross annual earnings. In a perfect world, savings would begin in your early 20s and last throughout your working years.
MONITOR YOUR INVESTMENT PERFORMANCE
Have a retirement annuity or fund in place that you contribute to monthly? If you do, you will understand that markets move in cycles, so investment performances will vary each year and are sometimes not as pleasant as expected.
However, if your portfolio is not performing over a longer period, such as three to five years, you should be asking why and actively monitoring your portfolio. According to Money Web, an excellent way to measure your performance is against South Africa’s annual inflation target of 6%. If your portfolio is not beating inflation comfortably over more prolonged periods after costs, it should be a serious concern.
The investment advisors at Wallstreet Financial Services can help construct suitable portfolios to beat multiple benchmarks on a client-specific level. We help build a portfolio that best suits your long-term objectives. Investing in money market is no longer the safe place to be in a high inflation environment because your wealth will erode in real terms.
ENSURE THAT YOUR PORTFOLIO IS WELL-DIVERSIFIED:
Diversification benefits are well noticed when markets suffer a downside swing. This was very evident in March 2020 because of the Covid-19 crisis and the swift negative impact it had on markets. Diversifying a portfolio means not investing all your capital in the same asset class. A well-diversified portfolio will be constructed to include exposure to multiple asset classes as well as over various geographic locations. (Excerpt Money Web)
RETIREMENT PLANNING WITH WALLSTREET FINANCIAL SERVICES
“In a recent Brand Atlas survey of middle-income earners in South Africa, 41% believe their retirement plans are “a bit vague,” and only 1% have a well-thought-through plan which is being carefully executed.” (BusinessTech)
Do not leave your financial retirement plans too late. Even if you have just started working at eighteen, start putting money away now for a comfortable retirement later on; retirement planning is highly beneficial. Information is power; it is important to educate yourself and secure a retirement plan that will last throughout your golden years. Contact Wallstreet Financial Services to discuss your retirement options professionally.
When we look at your retirement goals, we dissect every part of your investment portfolio to provide an accurate overview of where you are and where you want to be.
Furthermore, why not look at starting a retirement annuity for your child from as little as R200 a month and help start them on their path towards retirement planning early? You can learn more here.