THE end of the year brings with it much optimism and openness. It therefore provides the opportunity to explore once more those topics we try and avoid all year such as retirement.
This other Friday I found myself seated at a table with four highly qualified professionals across the colour line at a year-end function here in South Africa. I have known this team of experts for more than three years now and they all fall in the 55-60 age bracket. They were all in animated discussions about the politics of the day when I asked one of the guys what he was going to do in retirement. The conversation immediately ceased followed by an awkward silence.
Eventually he replied he was not retiring yet. “But you are less than 5 years from the retirement age?” I ventured further. In South Africa this can be extended to 65, he dutifully pointed out for me. It still left him with less than 10 years to retirement but I did not want to push any further. What is it about retirement that stops people from even talking about it?
Some people are terrified about the adjustments to be made in the transition from the pre-retirement disposition to post-retirement world. Others may be acutely aware of their underfunded retirement predicament but instead of dealing with it they pretty much decide to shut it out. Questions we must all deal with at some stage are when will you retire? Where will you live and what will you do?
At a chemical manufacturing company I worked for in Harare, I once attended the funeral of two of the factory workers; one who died just after two years of retirement and the other within the first year. In a post-burial discussion with the group of former colleagues, we travelled with the topic that if you asked a person to retire you are basically asking them to go and die.
Yet retirement should not mean the end of working, planning, dreaming but working only if you want to, not because you have to. It can be a big opportunity to open other doors that had been shut. Opting to start new hobbies or businesses can give meaning and purpose to your golden years while allowing you to continue playing a role in the economy.
Financial needs assessment indicate you need enough income to cover your living expenses and any discretionary expenditure as well as enough available capital when you retire. The transition towards retirement requires you to have a capital base to settle outstanding debts, replacement of your vehicle every now and then, travel and holiday, medical costs and an emergency fund.
A 2011 Sanlam study showed that to replace 75% of your pre-retirement income you need to save at least 22.5% of your pre-retirement income for a period of at least 30 years. Another Forbes study indicated that, “by 45 years of age, about three times your annual salary should be socked away in savings”. Many of us have done the maths and it is not anywhere near these figures, which indicates that there would be a dramatic drop in standard of living in the post-retirement phase. The reality is that many people are living much longer post-retirement, putting a further strain on the retirement nest egg. With advances in modern medicine, some people who retire at 65 may get the grace of living further north of 90 years. The other alternative would be to retire late, say around 70. When constructing your post retirement you have to build in this increase in your life expectancy and your investment horizon.
Quality health care service is going to be costing you an arm and a leg in your retirement. The challenge now is to make sure that the nest-egg you have built up affords you a comfortable retirement that lasts for the rest of your life. It is important that when we finally retire, at a minimum, our own home should be mortgage free. One of the colleagues I sat with at that year-end function remarked that he was happy to that his R2million rand house was fully paid for.
The only problem was that he was going to live in it so it would not add any additional capital in his retirement journey. It would have been different if he was downsizing to say a R500,000 retirement unit and the other R1.5 million used to purchase say 3 R500,000 rental units with potential to provide a monthly gross income of R15,000. An arrangement like this would spread the risk over three units which can also be sold separately as circumstances change with ageing.
Again, the retirement plan should be kept updated and relevant with regards to your changing circumstances. To keep pace with inflation, you will need a certain allocation to growth assets, such as equities, in your portfolio including in the post-retirement period. To reduce overall portfolio volatility you should diversify across asset classes, that is, equities, bonds, property and cash.
It is also important to view these needs within the context of your capital base and the income that your capital can generate at the level of risk that is acceptable to you. If there is a shortfall between what your capital base can produce and your needs, then it will be necessary to review your needs and rationalise the ones that are less of a priority. Part of this process would also be to account for any future capital inflows from the sale of assets, which could help fund the shortfall.
The result is that your capital might not appreciate ahead of inflation and as a consequence, your income will not maintain its purchasing power in the face of inflation. In the worst-case scenario, you could actually start to erode capital, which increases the risk of running out of capital in your lifetime. Retirees often make the mistake of adopting an investment strategy that is too conservative as they feel the need to protect their capital against market volatility or to generate an increased level of income from their investments. Once again the risk is that both your capital and income don’t keep pace with inflation.
Retirement should be the epilogue of a life well lived, it is part of the journey of life which we must embrace.
Tafirenyika L. Makunike is the chairman and founder of Nepachem cc (www.nepachem.co.za), an enterprise development and consulting company. He writes in his personal capacity.