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You only have yourself to blame

26 May 2022 Gareth Stokes

The statistics covering savings outcomes in South Africa’s formal retirement funding industry are shocking, varying from the oft-reported claim of only six in 100 people saving enough to maintain their pre-retirement lifestyles in retirement to the more recent comment that 60% of individuals nearing retirement “lack the confidence that their income will cover their monthly expenses throughout retirement”. How, one wonders, should a 21st Century financial adviser or financial planner respond to these statistics.

Tell your clients like it is

One response may be to give the client a stern “you only have yourself to blame” lecture. The financial adviser could then continue: “you have been reading and writing about the formula for a successful retirement for decades, how on earth did you fail to follow the basic steps of saving from when you start your first job; saving 15% of your annual gross income; and always preserving?  Answering the question turns out to be easier than correcting the shortfall. 

You see, dear reader, many South African savers are playing catch up on their retirement savings because they delayed setting out on the journey for too long. As professionals in the financial and risk advise disciplines you will all know how quickly the required monthly retirement instalment grows if your clients start saving at age 30 or 40 instead of 20 or 25. In the last couple of weeks we stumbled across two articles that should help your clients not to make such a basic mistake. The first was an article posted online by Just SA titled ‘Five common mistakes to avoid when planning your retirement’. We have since seen the article attributed to Bjorn Ladewig, Head of Distribution at the retirement income and life annuity specialist. 

Another ‘five retirement mistakes’ piece

Just SA noted that “retirees make the same errors time and time again when it comes to important decisions about retirement income”. The following paragraphs will highlight the key outtakes from the article alongside reflections based on the writer’s experiences and comments from another useful article by Nirdev Desai, Head of Sales at PSG Wealth, titled ‘Creating financial security for your future requires discipline and time’

Mistake 1: Underestimating how long you will need your retirement income to last 

“Longevity is an accelerating macro trend, with World Economic Forum research revealing an average life expectancy of at least 100 for those born after 2000, which is more than a decade longer than their parents’ generation and two decades longer than their grandparents,” wrote Ladewig, explaining why so many retirement savers are become more anxious as their retirement dates approach. An obvious solution is to delay retirement and to continue working part-time and / or take on other work post-retirement. 

Concerns over longevity should be addressed in discussion with financial advisers, regardless of where you are in the savings journey. A financial adviser can offer peace-of-mind by assisting his or her clients with calculating how much capital they will need to retire comfortably at some future date, given prevailing longevity trends. And at retirement, the adviser can ensure that his or her client purchases a sensible combination of life and living annuities, plus makes sensible drawdown decisions, to ensure a sustainable pension income for life. 

The earlier this discussion takes place, the better. “The optimal way [for your client] to achieve consistent and attractive returns is to be invested through all market cycles in a time horizon appropriate to their plan; [your role as] financial planner is to explain to clients what to expect from their portfolios through different market cycles, so they can manage their behaviours when markets react unexpectedly,” wrote Desai. 

Mistake 2: Putting too much value on flexibility

There are trade-offs between the flexibility of the living annuity and the risks associated with it. “Research has shown that the majority of people in and approaching retirement do not want to take risks with their retirement fund money (65%) and many cannot afford to lose any money at all (38%), yet living annuities remain the most popular choice,” writes Ladewig. This fact is confirmed by statistics published by the Association for Savings and Investments South Africa (ASISA); but it will require a mindset shift from both advisers and savers to achieve a turnaround to life annuities or hybrid life and living annuity solutions. 

Mistake 3: Placing too much importance on a capital legacy

We can think of two reasons why a retirement saver might go the living annuity route. The first is because they have not saved enough to secure an adequate monthly income from a life annuity, thus opting for a living annuity that allows them to draw down up to 17,5% of their capital each year. The second is to leave a legacy for their beneficiaries. “Having an income that lasts and leaving a legacy are often opposing ideas [and] choosing the wrong annuity product so that you can provide for your dependants could mean that you end up dependent on them instead,” comments Ladewig. 

This concern seems of particular relevance to the first groups of South African retirement savers who were converted from defined benefits to defined contribution funds in the 1990s and 2000s. In many cases the decision to go the living annuity route has worked wonders thanks to the stellar performance of the JSE over certain timeframes; but many have suffered financial hardship due to entering the living annuity market just prior a multi-year financial market pullback. 

Mistake 4: Believing it is all or nothing

The fourth mistake is linked to the comments about flexibility, and responses thereto, made under the second. The message is that your client need not go all in on either a life or living annuity. “You can mix the two with a blended annuity approach by combining retirement solutions to provide income for life, flexibility and the opportunity to leave a capital legacy,” Ladewig said. 

Similar trade-offs exist in the 40-year-long retirement savings journey. According to Desai it is seldom as simple as having 40 years’ worth of steady income with which to accumulate enough to buy a sustainable lifestyle after retirement. “You and your clients must plan for unexpected events that may occur along the way, to include setbacks such as retrenchments, loss of dual income in a household or additional unplanned dependants on household income and windfalls such as bonuses, inheritance or tax rebates,” he said. “Clients can use these cash flows to bolster their holistic financial planning objectives”. 

Mistake 5: Going it alone

And finally, something this writer fully agrees with: “without an accurate understanding of your current financial situation and retirement needs, it is almost impossible to set realistic and achievable financial goals”. Just SA’s research suggests that only 40% of pre-retirees and retirees use, or intend to use, the services of a professional adviser… This is not a sensible roadmap for retirement success! 

What is needed is a combination of holistic financial planning and the implementation and frequent review of a financial plan. We conclude with some choice words from Desai: “Holistic financial planning that may take decades to address should be the goal of those looking to achieve financial freedom … life is full of uncertainty, so financial plans need to be re-evaluated regularly to ensure they continue to be aligned with your clients’ needs, particularly if unforeseen setbacks to their plans occur”. 

Writer’s thoughts:
Holistic financial planning and having an annually reviewed financial plan in place are seen as key components for a saver’s financial wellbeing. In your experience, are clients or consumers seeking financial advice early enough to allow them to take remedial steps in the event their retirement savings plan is inadequate? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comments

Added by Gareth, 26 May 2022
Indeed @Andre... I have spent some time at my brother's auto repair shop in the past, and know all too well how much of a shock that R15-R20k vehicle repair causes to household budgets. There is barely enough for daily living, let alone enduring shocks and saving!
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Added by Gareth Stokes, 26 May 2022
I agree @Lucille, mainly due to the many expenses that salaried & taxed South Africans incur to make up for a failed state... We have to contend with medical aid, school fees, security costs and, nowadays, extra diesel / solar electricity generation costs too!
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Added by Andre Kruger, 26 May 2022
And then "life" happens which throw all your planning in the water. Life is throwing so many curveballs, that you get to a point where all the planning means nothing since you do not have the means to afford all these excellent planning with the best intentions.
Just a reality check, I have seen very few people achieving this goal as a salaried employee in 41 years in the industry, .........just my 2 cents opinion
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Added by Lucille Horn, 26 May 2022
It is expensive to live in South Africa
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