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Exposing myths about retirement funding

12 January 2010 PPS Insurance
Mike Jackson, CEO of PPS Insurance

Mike Jackson, CEO of PPS Insurance

Millions of South Africans face a future of working well past the retirement age in order to shore up their finances. Inadequate financial planning means many face running huge shortfalls on what they would actually need, in order to retire contentedly.

It is estimated that only 6% of South Africans will be able to retire comfortably. In addition, a recently published global survey* also revealed that 64% of workers think they will have to delay their retirement plans because of the recession, with 19% expecting to have to work for an extra six to nine years.

According to Mike Jackson, CEO of PPS Insurance, many people just don’t give enough thought to planning for their retirement with the result that they are forced to continue working for much longer than they originally expected. “Many people appear blind to the need to save adequately. There seems to be a general assumption, especially among the young, that they will be able to retire comfortably even without putting adequate provisions in place.

“Putting off a retirement savings plan, even for just a few years, can have a seriously detrimental effect on your final income at retirement, yet many people delay making any such plans as they still believe that this is something one does later in life.”

Mike attempts to dispel some of the myths currently surrounding retirement saving:

1. Myth: My company pension scheme will be enough

Reality: Company pension schemes used to be seen as the only savings vehicle necessary for retirement.

Nowadays, however, most pension schemes will only end up paying out a much smaller percentage of your final salary. A company pension is a solid savings vehicle. However, if you wish to maintain your lifestyle into retirement then you need to consider other assets too.

2. Myth: My expenses will drop after I retire

Reality: It is true that in retirement, certain expenses will decline or even stop altogether. You no longer need to drive to work every day or pay into a retirement fund and hopefully your bond will also be paid off. Nonetheless, other expenses such as health care are likely to cost you far more in this period than at any other time in your life. Whilst you may have a medical aid, sometimes there are additional health care expenses that you will need to meet. Those adult children who you thought would be financially independent, often return home for support after various setbacks!

3. Myth: My house can help to finance my retirement

Reality: Using rental income from a second home to supplement your retirement can be a good idea. A common trap many people fall into, however, is to look at their own home as a savings vehicle. When you see your house appreciating from its original purchase price, it is easy to feel cash-rich and to assume that this extra equity will help to fund your retirement plans.

Equity released from your home can provide a lump sum, but you will still need somewhere to live afterwards and rent can quickly deplete savings. The other option is to release equity by downsizing or moving to a cheaper area. However, while your 40-year old self may be willing to do this, you may feel very different upon reaching retirement.

4. Myth: I can’t afford to get proper financial advice

Reality: Some people make the mistake of thinking that financial advice is a costly affair and is therefore only the reserve of the wealthy. The financial services industry is a maze of products and information and determining the right one for you without any proper advice is a hard task.

For anyone who wishes to retire comfortably, it is important to undertake a financial needs analysis. This will help identify how much money you need to retire comfortably, whether you are on track with your retirement plans and, if not, how to achieve these. A competent and accredited financial adviser can do the same for you.

5. Myth: I need to fund the children’s tuition fees first

Reality: Avoiding saving for retirement in order to fund your children’s tuition fees at university may be a noble cause but it’s an absolute no-go unless you want your children to be supporting you in your old age. Children can access student loans and grants in order to help fund their course, but there will be no such financial help for you when you retire. If money is tight, then encourage them to attend a local university and remain living at home, but don’t stop saving for your own retirement.

6. Myth: I’m too young to think about retirement

Reality: Most young people make the mistake of thinking that retirement is so far in the future that they can put off thinking about saving for retirement until later in life. The reality, however, is that delaying your contributions even for just a few years can have a huge impact on your final retirement fund.

For example, a 25-year old saving R1 000 a month, with an investment return of 12%, would have a retirement pot of R5.96-million at the age of 55. If this same individual delayed saving by just 5 years, his retirement pot at 55 would be worth half that amount at just R3.07-million.

7. Myth: I’m too old to start saving now

Reality: One common piece of advice about saving for retirement is to start as early as you can. However, if you’ve left it late and are only now beginning to think about what you will live on when you retire, don’t stick your head in the sand. It is better to save late than to not save at all. Put away as much of your salary as you comfortably can - a few years seriously dedicated to saving can make a massive difference in your final pension pot.

 

8. Myth: I only need enough for 25 years

Reality: One of the biggest problems facing people in their retirement funding is underestimating how long they will live for. Life expectancy is increasing and with some people spending as much time in retirement as they did at work, it is increasingly important to ensure that your savings do not run out. Most people find the prospect of having a guaranteed income for life attractive, yet in reality, many cash in an annuity and opt for retirement benefits in a lump sum form.

* Survey by Aon Consulting.

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