Retirement: What to do when your nest egg is not enough

Wilfred Moyo, Investment and Economic Strategist at Metropolitan.

After years of dedicated service and hard work, you feel that you have earned the right to enjoy a comfortable retirement. Unfortunately, this is not the reality for many South Africans. Research shows that many people realise that they have a shortfall of retirement savings that may not sustain them for the rest of their lives.

In the below Q & A, Wilfred Moyo, Investment and Economic Strategist at Metropolitan, explains how to best manage your retirement savings leading up to retirement so there are no nasty surprises…as well as what to do when your nest egg starts to show some cracks.

1. When someone discovers that they are ill-prepared for retirement and will be retiring on very little money - what should be a top priority? How can they minimise the damage?

Don’t panic! You need to remain calm to make informed decisions.
Firstly, you need to decide how much money you would like when you reach retirement, considering the shortfall between your ideal amount and the amount currently saved, as well as the time period that you have until you reach retirement age.

Develop a strategic plan to help you realise your retirement goal, whether this entails working beyond normal retirement age, or opening up your own business. Another option is to downsize where possible to minimise living expenses and to free up some money.

Avoid taking any unnecessary risk with your retirement savings. If you are close to retirement, ensure that your retirement savings do not have a high exposure to high risk assets, such as equities. Higher risk assets are more unstable over the short term so you would need a longer time period to achieve your retirement goals.

Finally, sit down with a registered financial adviser for retirement savings advice and guidance.

2. Is it worth delaying retirement, if possible?

Yes, it is definitely worth delaying retirement and continuing to work, as it will give your retirement fund extra time to grow while you are still earning an income.

Another benefit of delaying retirement is that you could pay less for a retirement annuity. The reason being that when you retire, you invest your retirement savings built up during your working lifetime into a retirement annuity, which then pays you an income during your retirement years. If you delay retirement, the number of retired years that you need an income will reduce; therefore the retirement annuity will cost less.

3. Upon retirement, how should one manage what little money they have?

You should only access your funds in order to meet your lifestyle needs. Keep in mind that your money needs to last throughout your retirement years. Avoid debt during retirement as the interest on repayments will reduce your savings.

4. How can we prepare ourselves mentally for the reality of retiring on minimal savings?

You will have to prepare yourself for a lifestyle change. Given that you are retiring on little savings, you will have to be prepared to cut down on luxuries and prioritise those expenses that are essential.

Speak to trusted friends and colleagues for advice and guidance, and get in touch with a financial adviser who will help you manage and maximise your retirement savings.

5. How can we avoid retiring with insufficient funds?

While you are still working, set a retirement goal of how much money you would like to have when you retire. Develop a plan to reach your goal with the help of a registered financial adviser. Remember that you are responsible for the success or failure of your retirement plan. The financial adviser’s role is to guide you and give you information to help you make an informed decision.

For example, try to get a better understanding of the underlying investment portfolios of your retirement fund and how this affects your retirement savings. You have the right to ask for all relevant information regarding the retirement fund, such as the main aims of the investment portfolio where your money is invested. Try to educate yourself on economic issues. Understand the impact of regulatory changes on your pension such as retirement reform, tax issues etc.

6. What are the most important things to remember when it comes to planning for retirement?

• Consider the amount of time you have to save or invest before you reach retirement age. Start saving for retirement the moment you start working and allow your money time to grow by not withdrawing it before you reach retirement age
• Preserve your retirement savings when you change jobs
• Contribute enough money towards your retirement fund to reach your goal, and try not to miss paying your contributions for extended periods of time
• Solid, consistent investment growth happens over time. Be patient, and you will start to see the effect of compound interest (interest earned on interest)
• Build an inflation buffer to ensure that the value of your money keeps pace with rising costs
• Manage and clear your debt (where possible) to get the most value from your retirement savings