Retirement reality: Too old to be working but too broke to retire

Often people ask themselves when it is a good time to retire, but the answer is not as simple as saying at age 60 or 65. The reality is that people would retire at 40 if they wanted to but their financial status does not allow for this decision. Only 3% of South Africans can retire with financial independence. This financial status is normally a reflection of the financial planning that was implemented throughout their income earning years....but how many people prepare their finances for retirement? Definitely not a lot of people seeing that South Africans are notoriously not good at saving! Even for those that are able to retire early, the expectations that are set on the standard of living that they would like to lead is never met as their retirement package does not meet these needs.

A further daunting reality is that if an investor has been on an employer sponsored pension fund they will still need to make up between 30% and 70% of their retirement income through personal savings generated between their income earning years. The accumulation of retirement capital therefore becomes a huge problem and the recession has not been a positive step in this regard.

One of the solutions to this problem which is not a great deal of fun for people is BUDGETING! Effective budgeting will, in a disciplined way, highlight areas of great concern and will plan an investor’s income expenditure and optimise disposable income. Once a budget is in place, personal financial objectives can be set and strategies put in place to ensure a comfortable retirement. One of these objectives is to determine the amount of future monthly incomes that will allow the individual to live after retirement. Factors such as lifestyle; children; required date of retirement; inflation; assets and taxation influence this determination.

The following trends have become apparent of late in relation to retirement:

· People are retiring younger – the reason for this is a bit abstract. Proper financial planning has had a lot to do with this as it is much easier to take the retirement step if you are sure of your financial independence.

· BEE and transformation – policies surrounding this have also removed a number of ‘older’ players out prematurely.

· Retirement vs. Retrenchment – no real distinction is made between retirement and retrenchment. Often, retrenchment becomes retirement when retrenches’ are unable to find employment, eventually giving up their search and they then could be defined as retirees.

· Collective Investments, as a proxy for general saving had been growing massively over the last decade and five years. This does, however, not mean that people are saving more – perhaps just more in this environment and maybe not in endowments and direct shares.

· Age of the population and general demographics play a role

· HIV / AIDS is also a massive issue and will impact massively on the above.

One mistake that investors land up doing is that they think having a retirement plan is enough to get the job done, however, this is just one part of the holistic financial planning. This is where financial planners play a role but often they sell products and enjoy lavish conventions from their suppliers and they don’t embrace fee based financial planning with a solutions based bias. That’s why one needs to evaluate and review their financial planners on a regular basis to ensure that they form part of the percentage of South Africans that will have financial independence upon retirement.

Retirement planning in South Africa has, however, come a long way, especially within the black population, but even with the progress, there is still a considerable amount of behavioural change that needs to happen.