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Retirement planning

Writer's picture: Tim SmithTim Smith

Updated: Nov 10, 2022

Your retirement commences from the first day you start working...

Retirement is actually made up of 3 phases. Phase 1 is the accumulation phase, phase 2 is the retiring phase and phase 3 is the withdrawal phase. The day you start working you enter the accumulation phase which is actually the most important phase.


So many people only seek out financial advice about retirement planning in their late 40s or early 50s . After discussing their goals and needs, and running the required calculations the outcome is unfortunately so often the same: either they now need to save an astronomical amount per month in order to provide for a comfortable retirement or they need to settle for a mediocre retirement.


These people are so often totally unaware that the most meaningful time for their retirement is actually drawing to a close before they even retire. Sadly this scenario is a South African norm.


According to the South African National Treasury, unfortunately only about 6% of South Africans are on track to retire financially independent! In addition to this, a survey performed by Sanlam found that the overwhelming majority of people would either be dependent on their family in their retirement, or be forced to continue working until they could actually afford to retire. 

These scary statistics are not unique to South Africa, a 2014 report by the Federal Reserve (the United State's version of our Reserve Bank), found that almost one third of all Americans have no retirement investments or pension plan in place at all, let alone an adequate one. In Briton, it is estimated that the average number of years a person’s retirement investments will last is 7 years, while the average number of years a Briton lives post retirement is 17 years. Suffice to say, these scary statistics serve as a terrifying confirmation that globally there is a retirement saving problem.


One might argue that governments normally provide some form of minimum pension or more commonly a pension to those who have no retirement investments of their own. While this is true, the constant strain on global government finances means that even this might not be sustainable in the future. Thus, worst case scenario you lose a very risky bet and receive absolutely nothing from the government one day. Alternatively, you possibly earn a meager pension, which can be described as anything but a best case scenario - see below note.


Note: a state pension is only available in South Africa if you do not earn more than R78,120 p.a. if you are single, or R 156,240 p.a if married and you do not have assets (including your house) worth more than R1,115,400 if you are single or R2,230,800 if you are married.


Proper retirement planning

Proper retirement planning is the process of setting retirement goals for yourself and then taking appropriate actions to bring about the realisation of these goals. This process should start as soon you start working and should continue all the way up until your retirement and beyond.


In my experience, the biggest problem is not that people don't consider retirement planning at all, but rather that they only start to give their retirement some serious thought around their age 45-60. By this time however it is normally far too late to make a meaningful difference to their retirement outcome.


"If you aim at nothing you will hit it every time" - Zig Ziglar.


Start early

The honest truth is people need to start giving their retirement planning more thought much earlier in their lives. Many people procrastinate thinking about, planning and investing for retirement for one of four reasons:

  1. They see retirement as an issue that only needs to be tackled in the distant future;

  2. They do not know where to begin, as how can they possibly plan for something so far in the future?

  3. They have a feeling that they are already behind in their retirement planning so they would rather not find out for sure and live in a place of ignorant bliss; and

  4. They say they can't afford to investing towards their retirement

Let's tackle these four points one by one.


1. Retirement is tomorrow's problem

If you are still young, it may well be true that your retirement is decades away but time is an investor's best friend.


There is a saying in the investment field that states: "It is time in the markets, rather than timing the markets, that actually counts". The point that this saying is eluding to is that one is much better off investing for the long term rather than attempting to make a quick fortune on taking bets on the market's short term ups and downs.


The graph below illustrates the power of starting early. The blue shaded area represents the actual capital invested over the relevant periods (assuming a starting contribution of R500 p.m. escalating at 6% p.a.) and the green shaded area represents the growth on these contributions over the relevant period (assuming a growth rate of 10% p.a.).


As you can see the longer the period you are invested for means that there is more time for your money to grow under the power of compound interest/growth. So much so, that after a 30 year period, your contributions only represent about 25% of your final investment value, while your growth on these investments represents about 75% of your final investment value.

These graphs also illustrate that if you only start investing a few years before retirement you don' really give your contributions an adequate chance to grow and realise their full potential , or yours for that matter.


Your retirement commences from the first day you start working. Start investing today, your future self will thank you later.


2. How can I possibly know what I will need/want before retirement?

There is a Chinese proverb that states that a journey of a 1,000 miles begins with a single step. For me this is a perfect description of the process of setting goals for retirement planning.


While we don't know what your 500th or 999th step will look like, we do at least know and can plan for your 1st step.


In line with this, retirement planning is actually relatively simple. Our first step is looking at your financial situation today and then finding answers to questions like what would you need to do to replicate your current living standards in retirement, less certain expenditure that shouldn't exist in retirement (education fees, bond and vehicle repayments, and saving for retirement). After doing this we can look to add in some retirement specific goals, for example traveling and/or increased medical costs.


We then run financial projections (which provide for growth, inflation etc.) and compare what you are currently investing versus what you need to be investing. We repeat this process year on year in line with your changing circumstances.


I can guarantee you that your actual goals at retirement will probably look quite different. But the power of having a plan in place from day one is threefold:

  1. It is much easier in the long run to make minor adjustments to an existing plan every year than to simply wait until just before you retire to come up with the actual plan;

  2. A plan facilitates informed decision making and is a call to action; and

  3. Even if your plan changes and we need to make adjustments, what you have saved based on your prior plan is already on the table. In other words, you are already better off than if you were to starting planning and investing today.

Start planning with what you know today and amend your plan as needed.


3. Retirement planning versus ignorant bliss

The sooner we find out if you are on track for your retirement the better chance we have of being able to make adjustments to either:

  1. Eradicate any shortfall you may currently have; or

  2. At least limit the damage and thus provide you with the most comfortable retirement available given the circumstances; or

  3. If we find you are ahead of where you need to be we can better prioritse these funds towards any other possible needs or goal or possible shortfalls in the event of your death or disability.

In a sense, this can be compared to a scenario where you have a medical condition but may be embarrassed to go and see a doctor. The fact is, the sooner you see a doctor, the sooner you can receive guidance and the required medical interventions to either bring about a total reversal of your condition, or to at least limit the adverse affects thereof.


In addition to this, more often than not the doctor has seen what your ailment is many times before so you had no reason to feel embarrassed in the first place. In fact, the reason you go to a doctor is that they have trained for such a purpose and have experience in treating such ailments.


By the same token, don't be afraid to seek advice on your current financial situation. As financial planner, we have trained for such a purpose and have experience in treating financial ailments. We can either help you find a complete cure/solution or at least minimise the impact and consequences of previous decisions.


Please don't let your ignorant bliss become a knowledgeable catastrophe.


4. I can't afford to save for retirement

People sometimes say they would love to save for retirement but they simply cannot afford to at the moment. They go on to say they definitely will start investing in the future when their budget is a little bit less tight.


The reality is that life doesn't get any easier or one's budget any looser. One goes from paying off a student loan to paying for a wedding, buying a house and/or car and then having, providing for and educating your children. Before you know it you are 45-50 years old and you find yourself in the same shoes many of those who have gone before you with little to no retirement investments.


The unfortunate consequences of constantly saying you cannot afford to save for retirement is one of two outcomes: Namely, you either have to save a greater proportion of your income later on in order to play catch up, or face an anything but comfortable retirement.


A better way to look at your finances is not that you can't afford to save for retirement, but rather you can't afford not too.


It is not the finish line

Retirement should never been seen as the final whistle but rather as half time. This perspective is important for two reasons:


Firstly, your purpose and reason for living in retirement is just as important as your purpose and reason for living before retirement. Many people give little thought to this in the lead up to their retirement and find themselves wandering aimlessly through retirement or bored out of their minds. One can only garden and play golf so much before the novelty wears off. Thus in the lead up to your retirement it is important that this consideration enjoys as much attention as your actual retirement investments.

The second reason this perspective is important is that modern retirements are becoming longer and longer and can represent between 20%-30% of your life, that is quite a decent segment of your life.

The average human's life expectancy has increased greatly in the last couple of decades in line with the advances in modern medicine a well as preventative care. More and more people are living well into their eighties and even nineties.


Why is this important? Well, if you were to retire at age 65 and live until your age 90, this would be a period of 25 years during which your retirement investments need to provide you with an income and you need to keep yourself busy.


Keep revising and monitoring

According to a survey performed by Sanlam, over 90% of people don’t revisit their retirement investments after initially signing up. This same survey also revealed that close to 60% of people do not reinvest/transfer their retirement investments when they change jobs, which effectively means these investments are lost each time they change jobs.


While starting as early as possible with one’s retirement planning is a definite must, this doesn’t mean that it is a once off task. Retirement planning is a ongoing process which must be revisited at least annually with a qualified financial planner in order to ascertain if you are still on track to achieve your retirement goals and make any changes if necessary.


This brings me to my next point, with a qualified financial planner by your side the above mistakes are easy to evade. Research performed by The Vanguard Investment Management Company, who currently manages over $5.1 trillion and is rated as the second biggest asset management company in the world, indicated that a financial planner could add a potential total of 3% per annum in net return to their average client.


The research indicated that this value is generated via the following means:

  1. The suitable allocation of capital between the various asset classes in line with their client’s risk tolerance and investment time frame;

  2. Cost-effective investment of their client’s capital. Price is what you pay, but value is what you receive;

  3. The re-balancing their client’s portfolio when required and only when required;

  4. Assisting clients to not only formulate and document their financial plan, but more importantly assisting their clients in sticking to this plan;

  5. The tax efficient allocation of their client’s funds between the various investment vehicles in order to ensure both that tax efficiency is maximised while liquidity in retirement is adequately provided for; and

  6. Correctly structuring their client’s investments in retirement in order to balance the need for a consistent stream of income and the need for long term growth.


Another value-add of using a financial planner which is not included in this report but no less important, is the fact they can assist you in determining where your shortfalls and/or surpluses exist in relation to your needs, goals and aspirations and assist you in reallocating/prioritising  your capital accordingly.



Contact me today so that we can plan for your best retirement.



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