Will the retirement of your dreams be beyond your means?

Working out how much is JustEnough to save for retirement is sometimes not a priority when simply making ends meet is a struggle. But realistic retirement planning is important if we want our retirement income to match what we expect it will be.

“South Africans are underestimating the proportion of their retirement income they will need to allocate to basic living expenses and the amount of money they will need for discretionary income. In fact, we found in the latest Just Retirement Insights that there is a major gap between expectation and reality,” says Bjorn Ladewig, longevity actuary at Just.

According to Just Retirement Insights – independent research commissioned by Just – South Africans’ expectations of what their retirement income will be, based on current savings and returns, will not be realised. On average, respondents expect a monthly income in retirement of almost R12 000. This implies an expected annual income rate of 8%, based on their average retirement savings of R1,8 million. However, in current market conditions this expectation is not achievable – guaranteed lifetime income that targets inflationary increases provides an annual annuity income rate of approximately 6,5% for a couple where the male is aged 65 and his female spouse is aged 61.

This means that, to achieve the expected level of income, 22% more needs to be saved to reach R2,2 million. Even worse, if the expected level of income is to be achieved through a living annuity, a retirement saving of R3,6 million is required. This figure is based on the draft maximum sustainable income rate recommended by the Financial Sector Conduct Authority for living annuities for a similar couple, which is only 4%, compared to the 6,5% above.

The gap is a problem for all

The gap between expectation and reality is evident for all income groups, as the following survey results from Just Retirement Insights show:

These expectations are not realistic if compared to the 6,5% income rate achievable in current market conditions, as set out above, for a typical retiring couple. This “expectation gap” is even bigger for higher-income groups.

The impact of debt and longevity

According to the Schroders Global Investor Study 2018, South Africans are under-saving by six percentage points, when looking at what they expected to get out of retirement savings, compared to what they put away.

The study shows that retirees are receiving a much lower proportion of their final salary in retirement (59%) compared to an expectation of a comfortable 80% of final salary. This contrast is far greater than what is being experienced globally, where retirees predicted that they would need an average of 74% of their current salary or income to live comfortably in retirement, but are receiving 61% of their final salary annually.

Approximately 56% of middle-income consumers in South Africa spend all their monthly income in five days or less after receiving it. This is according to data from FNB’s Retail segment, which categorises middle-income consumers as those who earn a gross monthly income of between R7 000 and R60 000. High spending and limited savings cause consumers to rely on credit to get through the month, making them more vulnerable to being caught in a debt trap and less able to save comfortably for retirement.

Putting off saving for retirement until later in life (even in higher amounts) rarely outperforms earlier savings, because of the impact of compound interest – earning interest on the interest you have already earned. Compound interest has a positive snowball effect on your savings, which means that the earlier you start saving, the better.

According to a BBC article written by Brian O’Connor (“The unrealistic expectations of retirement behaviour”, 2019), a survey from American financial services company Northwestern Mutual showed that one in three baby boomers has $25 000 or less saved. According to Money Advice Service, most retirees also underestimate how long their retirement years will last. Only planning for 20 years may mean running out of money – especially as men and women aged 65 in South Africa have a 50% chance of living beyond ages 83 and 87 respectively.

Our later years may require more money because of end-of-life care – something that is not always factored in when saving for retirement. “People aren’t considering that they will be living for longer,” says Ladewig. “If we do need care in our old age, we may need it for many more years than we think. Recently, the oldest man, Masazo Nonaka, died in Japan at the age of 113, according to TIME magazine.”

Talk to a financial adviser

It is imperative for those reaching retirement to get the right financial advice when investing their retirement savings which are meant to last them for the rest of their lives.

Peter Chadborn, director of Plan Money, a UK financial advisory firm says, “People should put their expenditure requirements into two columns. One is the essential living costs that you want to secure with a fixed income source. Only then can you approach column two, which lists your discretionary lifestyle costs: how often you want to eat out, how many cars you want to own and how often you want to go on holiday.”

Those facing a retirement income shortfall would have to consider working for longer, downsizing their homes and cutting down on expenses where possible.

The best way to plan for retirement in an uncertain economy is through solid preparation and by setting realistic expectations. “Seek financial help earlier rather than later if you think you will need that,” says Ladewig. “When you are ill you contact your doctor; why hesitate to contact a financial expert if you have a money issue?

“The best solution for many retirees could be a combination of a guaranteed lifetime income to cover essential expenses and care costs for life, and a living annuity to invest additional retirement savings to cover any other lifestyle costs. Ask your financial adviser how,” concludes Ladewig.