Myth busting the bad retirement behaviours clients can make
Many articles have been written on the poor state of the retirement industry in South Africa. Very few people have a savings culture, very few people have a basic idea on how the financial services industry works, and even fewer people have access to professional advice.
This is not an ideal position to be in, and there have been significant efforts from government to reform the country’s retirement industry. This is taking the form of new legislation which aims to govern the industry and forcefully implement a culture of savings.
Using a pistol to kill an elephant
While this approach is noble in theory, government is finding it hard to implement these reforms. They met their first bit of stern resistance when the Congress of South African Trade Unions (COSATU) put its foot down on the forced preservation issue. Their argument is that government cannot force people to not have access to their retirement funds if they need these funds to live from day to day.
Government needs to tread carefully around the issue as COSATU is a key alliance partner of the ruling African National Congress (ANC), and has the voice and support of the people to severely disrupt government plans. Dawie Roodt, Chief Economist at the Efficient Group, says while government’s intentions are noble, they are using the wrong weapon to kill a big beast.
“The South African public does not have a good savings culture, and if they are not motivated to create one, it must be forcefully imposed on them. On the other hand, government’s public consultative processes are severely lacking. We have seen this with the E-Tolling system, and we are now seeing this with retirement reform. At the moment, government is ideologically lost. They know what needs to be done, but they possibly do not know how to achieve this,” says Roodt.
See retirement as a life event
When you are getting married, you save up for the event. When you have kids, you save for the appropriate length of time towards their education. However, this is seemingly not the case with retirement.
One cannot approach retirement without a specific game plan to achieve these goals. Part of this involves engaging with a financial adviser to look at behavioural mechanisms that will encourage retirement saving. Peter Hewett Certified Financial Planner (CFP), founder of advice company Efficient Advise and the 2014 Financial Planner of the year, says that there are a number of good and bad investment decisions that we need to be aware of.
“Besides saving towards retirement from early on in life, an emergency fund is an important fund to set up. As soon as you can, put together a budget with a small amount available for savings. Aim to build savings equivalent to two to three months of income, and keep it relatively liquid. This is because life happens and unexpected costs will emerge. When people are under financial pressure, they tend to take loans or jump to credit facilities, but the interest rates on these facilities can be extremely high, and many are designed to incentivise people to stay in debt,” says Hewett.
He adds that it is important to build up discretionary funds. Few people build up discretionary funds for their retirement. On retirement, compulsory funds do very little to allow you to structure your income. However, with a mix of discretionary and compulsory funds, you are able to structure your income to have a capital and income component. This will enable you to limit your tax liability in the early years of retirement and then, as you get older and start accessing higher levels of your compulsory funds, you are able to benefit from age-based tax concessions, such as medical expense deductions and age related rebates.
Avoid nasty surprises
While we all aim to make good investment decisions, there are a number of bad decisions that one can make. These are sometimes made unconsciously, not knowing the knock-on effects.
“Retail credit, such as overdrafts, clothing accounts and credit cards are very expensive forms of credit and people tend to use them to live beyond their means, compounding their financial problems. Funding current spending with future money is very risky. However, credit cards can be handy payment mechanisms if the card is settled in full every month, and can also be used in situations where a significant event must be covered like making up a shortfall in a cash car purchase,” says Hewett.
Get rich quick schemes are probably one of the biggest negative factors affecting the uneducated portion of society. If it looks too good to be true, it probably is. There are many complex products on offer, some of them promising returns of up to 19%, with capital guaranteed.
“It should be noted that the value of a guarantee depends on who is vouching for it. Investments are far safer through a reputable company such as a major bank, which is subject to stringent controls and legislation. A legitimate equity balanced portfolio should deliver returns of around 13% over the long-term, depending on market conditions. While a cash type investment would earn one to two percent over normal call account deposit rates, and bonds would deliver around three to four percent over normal call deposit rates. Anything offering returns far in excess of what is available through large listed financial institutions is likely to be risky or even questionable,” says Hewett.
Editor’s Thoughts:
It is funny how most of us unconsciously are probably guilty of a number of the bad habits described by Hewett from time to time. The key to overcoming them is through discipline and establishing a firm savings goal. The relationship between a client and an adviser is important in this as they are inextricably linked on this journey. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
