I have been involved in investments for more than 40 years and attempting for more than 21 years to provide independent financial planning. Although I enjoy the job, still, I am faced daily with hair-raising challenges. For example, a question I am asked regularly is, “how much do I need to retire and outlive my capital?” (and enjoy life). Yet, I still find people walking into our offices close to retirement and have no idea of what is facing them.
I am even more amazed by how many people rely on advice from acquaintances, colleagues, and so-called planners with little experience and minimum qualifications. For example, I usually ask a prospective client, “how many paydays are left until retirement.” A simple calculation is that someone at 25 who wants to retire at 65 has only 480 paydays, of which a certain amount must be saved for retirement to provide for inflation and last until death (which might be 240 months if you live for 20 years after retirement).
Here are some retirement myths to make you think:
I can start later when it is easier – the power of compound interest is one of the most powerful tools to achieve financial independence. Also, the sooner you begin saving, the less you must save each month from reaching any given savings goal, making the process easier to accomplish. For example, in the following two calculations, the difference in a R1 000 per month investment (growth rate = 8% and premium escalation = 5% per annum) over 480 and 240 months is illustrated.
To save R10m over 480 months under the same conditions, you need to start with R1 540 per month versus R11 600 over 240 months.
My retirement fund and annuities are adequate – Defined contributions, not securing pension saving when starting a new job, and cost-to-company remuneration has changed this all. And please, do not rely on a government pension or the children. I regularly meet people of all ages with no idea of the value, management, cost or growth of their retirement funds, the calculated value at retirement, the tax implications, and the purchasing power of the investments.
My spouse or inheritance from parents will save us – Say no more!!!
My medical aid will be sufficient after retirement to look after me – Retiree health benefits are diminishing. Businesses are having a hard time coping with increasing health insurance premiums and are aggressively reducing retiree health coverage. Also, the inflation rate of medical aid exceeds the official rate by multiples.
I will need less income after retirement – The truth is, estimating the amount you will spend during retirement is complex and unique to everyone. In addition, today’s retirees face 30+ year time horizons with inflation eating at their purchasing power, making a no-risk portfolio potentially the riskiest portfolio of all.
Our expected lifespan is 75 to 85 years – This is a statistical truth and a retirement myth simultaneously. If you look at an actuarial table used by an insurance company, you will see the statistical facts are accurate: the average life expectancy is in this range. However, this fact is irrelevant to anyone – including you. Half the people will live longer than the median, and you will do everything in your power to be part of that group. The chances of you dying promptly at an average age are close to zero. Therefore, it makes no sense to build a financial plan based on it.
Finally, the effect of inflation is detrimental. For example, to purchase a R1 000 item today will cost R7 040 at only 5% inflation per annum in 40 years.
I will be in a lower tax bracket when I retire (or even “I assume not paying tax after retirement”). There is not much credibility to the idea your taxes are going down (and I still find people under the impression that you won’t pay tax after retirement). Rather than hoping to be so impoverished in retirement that your tax bracket drops, it would be far wiser to build a retirement plan that is so successful you increase your tax burden or seek professional advice to lower your tax burden.
A taxable income of R300 000 (R25000 per month) from retirement funds at age 65 implies a tax deduction of more than R3 000 per month.
Already taking into account that income from retirement funds are taxed differently than income from discretionary funds.
I will live in the same place throughout retirement. Moving is often a significant part of retirement. You may find you may need an assisted living situation or an area with more transportation and maintenance services at hand.
Young financial planners can not assist in retirement planning. v Well-trained young financial planners with a CFP®qualification who completed a trainee program and enjoy continuous mentorship and working in a professional team gaining experience are often more valuable and can provide unbiased advice. Passion and process is the key to successful financial planning.
Maybe, after all, retirement planning is not the issue, but focusing on becoming financially independent (to be able to enjoy life) should be the solution/goal. Unfortunately, the insurance companies and the commission-driven remuneration of their agents instead of professional financial planning by well-trained and experienced financial planners contributed to many retirement myths and mistakes. A structured retirement plan, regular revisions and changes if necessary is the only way to achieve financial freedom at retirement.
(Additional information regarding the specific financial product discussed above, including key limitations; exclusions; risks and charges, is available on request to any APC Representative.)
It is important to note that every individual is unique (age, health, remuneration, etc.) and need their own retirement and wealth plan.
