I WAS CONSULTED recently by a top individual from the retail sector. Although not the CEO of this major company, he was certainly among the top three personnel. He retired on what appeared to be a very comfortable pension and the astute savings and investments he made throughout his working life enabled him to buy a large house in one of Sandton’s best suburbs. In addition, he has a holiday home in Camps Bay.
Being an extremely energetic man, and rather young to retire at 62, he took on various consulting roles, not for the money, but to keep himself busy. By 2023, the income from part-time consulting had become essential to maintain and enjoy his standard of living and by 2026, he needed full-time employment. Two choices were available to him – either to downsize his primary residence or sell his holiday home, which had by now become the family holiday retreat. Unfortunately, his retirement did not match up to the expectations he had so carefully planned for many years; although he considers himself much more fortunate than many other pensioners.
The question is: “What went wrong?” The answer is simple: inflation, plus a too-conservative investment strategy due to the anxiety surrounding the possible loss of money. This individual’s plight, as well as those of many others in similar situations, could have been avoided had they foreseen that their pensions would be inadequate for the kind of retirement they had planned – including the inadequacy of the contributions made like clockwork towards company pension funds over the years.
The big move, in recent years, from defined benefit funds to defined contribution funds has put the investment performance at risk for the pensioners. The true difference between the two types of funds is that the benefits are no longer directly based on the individual’s years of employment, nor their salary. Instead, a fixed percentage of one’s monthly salary is paid after deducting all the other benefits such as life-cover, disability and admin fees. This amount is then invested into one’s retirement savings. The capital sum built up over the period – which depends on the performance of the investment – is then used at retirement to purchase a pension, either a fixed or a living annuity. It is imperative that you understand all the implications before deciding on what type of annuity to purchase.
The theory behind this type of retirement saving is that inflation is ‘contained’ because the amount contributed rises each year with your salary increases. However, the problem with these increases is that you lose out altogether on the eighth wonder of the world, namely compound interest. The shorter the period, the less the upside and, although your earnings may escalate in later years and your contributions increase, insufficient years remain for the capital to benefit from real long-term growth.
I am concerned that, due to changes in structures, commissions payable on retirement plans are so small that not enough advice is given on retirement savings. Previously, an upfront commission was paid when purchasing a retirement annuity – now the commissions are spread over the term of the contract. This is a good change for investors, however, as they are not penalised by either reducing or discontinuing contributions.
Aside from the pension payout sometimes being less than expected, another reason so few can afford to retire is the lack of preservation of retirement savings when leaving a job. These savings are so very critical to your ultimate retirement plan. The new requirement to preserve at least 2/3rds of your retirement fund does ensure that at least these amounts are preserved for your retirement.
Planning for retirement should automatically commence when you start working. At the core of planning, you need to accept that membership of a pension fund is insufficient and that a person’s standard of living will decline after retirement, unless early and diligent attention is paid to pension and retirement planning. In addition, the inflation on essentials such as medical aid, electricity, rates and taxes and petrol will usually be higher than the published rate.
During retirement inflation is a bigger problem. You are likely to be more active enjoying the things you have always planned on doing and this costs money. This funding needs to be budgeted for, as you no longer receive a salary, and maybe all you have to live off is the income from your various investments until you ultimately start dipping into the capital.