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Retirement planning getting back to the basics

15 June 2007 Gareth Stokes

FAnews online joined a group of journalists at an Estate and Retirement Planning presentation by Tim Fearnhead, a consultant with BDO Spenser Steward. The presentation included a number of retirement planning basics that we often neglect. (Click on the h

Today's feature article attempts to remind readers and participants in the financial services sector about some of these basics.

First on the list is that it is never too early to start saving for retirement. The benefits of compounding mean that the earlier one embarks on a retirement saving strategy, the less onerous the task becomes. Fearnhead used a simple scenario to illustrate this point. He compared the required savings rate as a percentage of gross salary for individuals of different ages, wishing to retire at the age of 60 with 75% of their final salary.

You can save as little as 7% if you start at 20

Individuals who started saving at the age of 20 required a monthly contribution to a retirement vehicle of only 7% of gross salary. The amount of savings required escalated with each year the individual delayed. Someone who started saving at 25 would have to contribute 9% of his gross salary, starting at 30 required 12% and waiting till the age of 40 would require a savings commitment equal to 20% of a gross monthly salary. 

At the age of 50, with only ten years remaining to this imaginary retirement target, the individual would have to contribute an unmanageable 48% of his gross salary to a retirement fund!

The percentages in this scenario assume a 3% real growth in invested retirement funds each year. Of real concern is that the risk inherent in the retirement savings process increases exponentially as the time remaining to retirement decreases. A person of 20 can spread his investment savings over a period of 40 years. Should a huge crash in the equity market occur, he has many years to recover. If there are only 10 years remaining to retirement, there may not be enough time for big market shocks to be smoothed out.

The big question around retirement has moved from "When will I take retirement?" to "Can I afford to retire?" A tongue-in-cheek answer to this question is simply, "You can retire as soon as your money has a chance of lasting longer than you do!"

With improvements in medical technology the chances of living longer in retirement are far greater thus the age at which your money will last longer than you continues to increase. The result is more and more individuals who choose (or are forced) to work after retirement. The goal is to use any additional income to delay drawing down on the capital invested in the retirement fund for as long as possible.

Reputable advisers are vital in the retirement planning process

The second basic is to ensure that retirement savings are invested at the correct level of risk. Fearnhead believes that many retirement funds are invested far too conservatively. Financial advisers and Pension Fund Trustees tend to err on the side of caution when working with retirement savings. There are a number of reasons for this. One might relate to the ever present threat of sanction for failing to protect client's investments in terms of the FAIS Act.

Underlying pension fund investments are usually 'sold' as high risk, medium risk or low risk. Fearnhead believes this description is misleading and advisers should rather portray these options as investments with high, medium or low equity exposure. The requirement for reputable financial advisers to ensure that retirement savings are correctly allocated for the risk profile of the individual investor cannot be stressed enough.

Time in the market beats timing the market hands down

A third basic rule is not to remove retirement savings. A big concern in the South African retirement fund environment is the fact that individual investors are able to withdraw their pension fund contributions and provident fund contributions when they switch jobs. Hardly any of this withdrawn capital finds its way back to the pension fund environment getting spent instead on all manner of goods and services.

This is one of the phenomena that might have prompted government to look at a national social security system. There are many pros and cons to government proposals all topics for another article.

And finally, keep your retirement funds in the chosen investment vehicle for as long as possible. It does not help to attempt to time entries to and exits from the market. In the long term, time in the market is the only sure winner. As an example, the equity market in South Africa has returned 14.2% per annum, annual compound return going back to 1926!

Considering that money invested at 15% per annum doubles every 5 years, you can appreciate just how significant your retirement fund returns will be if the funds remain invested for as long as possible.

Editor's thoughts:
There has been so much media coverage of the financial services industry in recent years, that the current generation has little excuse for neglecting their retirement savings. However, things were not this open in previous decades. We would be interested to hear at what age you became actively involved in planning for your retirement. Send your answer to


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