80 is the new 60: How does this impact your retirement planning?

Thandi Ngwane, Head: Investments South Africa at Standard Bank

As life expectancy rises around the world, a growing number of countries are raising their general retirement ages, enabling people to work for longer and postpone the day when they start drawing on their retirement savings.

The retirement age in Greece, Italy and Iceland is already 67 years, and countries such as France, the Netherlands, Spain, and the United States are preparing to raise their retirement ages to 67 in the next few years. Many others are expected to follow suit and, as they do, are equalising the retirement age for men and women.

Governments are not alone in worrying about the economic impact of their citizens living longer. Among people approaching what is still thought of as “retirement age”, there is a growing realisation that the possibility of living for another 20 or 30 years – almost a lifetime in itself – is anything but remote.

In this era of increasing longevity, it has become clear that retirement is more open-ended than it used to be, and this prospect can be a scary thought.

While there is no magic formula that will allow your income to sustain you over the decades to come, there are various practical steps to consider.

Sound financial advice

The most important of these is to obtain good financial advice from a credible financial adviser. Whether your finances are in excellent shape, or you don’t have the time or expertise to attend to this yourself, there is simply no substitute for sound financial advice.

A financial adviser can help you think through some important considerations when it comes to planning for retirement while living longer. One such consideration is understanding what percentage of your pre-retirement income you will need to maintain the same standard of living that you had before retirement (income replacement ratio) and whether you are currently making adequate provision. Studies indicate that many South Africans would need to replace between 70-80% of their final salary to maintain their lifestyle after retirement, which means that if your pre-retirement income is R30 000 per month and your replacement ratio is 80%, you would need to earn around R24 000 per month in retirement.

In addition, throughout our work life, we often don’t consider how much lifestyle inflation can inflate our post retirement income needs, simply because we have become accustomed to more luxuries as we earn more. Often referred to as lifestyle creep, lifestyle inflation tends to happen gradually over time. Failing to consider lifestyle inflation could mean a failure to reach your post retirement income needs and not being able to maintain your desired lifestyle after you retire.

How much risk can you take?

One of the key things to discuss with a financial adviser is how much risk to take when saving for your retirement.

Traditionally, as people approached occupational retirement, they were told to be more conservative in their investment. Does that still make sense today when people are living longer and having to sustain themselves for longer? Should you be thinking of placing a portion of your retirement savings in a more aggressive asset class, such as equities or investments with offshore exposure?

Such decisions should not be made one-dimensionally because risk has many dimensions. It is not just a question of how much risk you are willing to take with your retirement savings (your risk appetite) but how much you would be willing to lose (your tolerance for risk). Good retirement advice will enable you to weigh up the multiple dimensions of risk and make decisions that are right for you and your needs.

Understanding different asset classes and investment vehicles

You should also be talking to your financial adviser about the pros and cons of different asset classes and investment vehicles. Equity and offshore investments have become quite popular among South Africans whereas retirement annuities have lost some of their appeal, to an extent.

The truth is that there is often a trade-off to be made. Retirement funds, including retirement annuities, for example, are restrictive in terms of the maximum tax-deductible contributions in any tax year, but their tax efficiency is attractive.

Similarly, the trade-off with equity and offshore investments is access to global investment markets and opportunities for growth to offset the rand’s depreciation, but there are prudential limits on how much exposure South African retirement funds may have to both equities and offshore assets.

If you have discretionary savings, however, you could put some of those into offshore and up-weight your equity exposure and use that as a vehicle to subsidise your retirement savings when the time comes.

Save as much as you can, for as long as you can

Whatever investment choices you make, ensure they are informed and do your best to follow the basic principles of saving as much as you can, for as long as you can.

That could mean exploring ways to delay your retirement so that you can continue to earn, save and take advantage of the benefits of compounding. If that is not an option with your current employer, is there a possibility of doing something else that could bring in some income and help stave off the day when you need to start dipping into your retirement savings?

Dipping into your retirement savings can be a huge temptation when you change employers on resignation but even more so when you use discretionary funds to save for your retirement. It is important to compartmentalise your savings, be disciplined and use an emergency fund, not your retirement savings, for emergencies.

Making some adjustments to your current lifestyle by limiting spending and saving that extra income will also pay off later, as will making sure you have reasonable drawdown rates on your pension so that it sees you through your retirement

Above all, get good financial advice.