Threats to South Africans’ retirements

Three prominent risks could prevent South Africans from retiring comfortably, and being aware of these threats could be the key to a longer, more financially independent retirement.

Citadel director and Western Cape regional head John Kennedy said that planning for financial security becomes crucial as one approaches retirement.

This is especially true for South Africans who want to protect the wealth they’ve built and maintain their lifestyles for the rest of their lives. 

Kennedy emphasised the importance of strategic financial management in retirement, especially considering that this phase can be further divided into three distinct periods, each requiring different financial approaches.

Retirement can be segmented into three phases: the active phase, the passive phase, and the supported phase. Each phase presents unique financial needs and challenges.

The first phase is the ‘active phase,’ which occurs in the early retirement years when many people remain active and engage in travel, hobbies, and other leisure activities. 

Kennedy said this period is characterised by higher discretionary spending as retirees fulfil their bucket list dreams.

The second phase is the ‘passive phase,’ which sets in as retirees enter their 70s to 80s, and their lifestyles often become more subdued. 

Travel and large-scale activities may decrease, their lifestyles may become more frugal, and they may look to ‘right-size’ their living arrangements.

The third phase is the ‘supported phase’, which involves increased health care and support needs. In this phase, expenses shift significantly towards medical care and assisted living.

 Kennedy said South Africans need to be aware of three risks when planning for retirement.

“Those who are newly retired or approaching retirement can benefit from looking at three key risks and making plans to mitigate them to maintain a good, steady standard of living,” he said.

The first risk is longevity risk, which rears its head when people live longer and, therefore, face the real danger of outliving their savings. 

“Planning for at least 30 years post-retirement is essential. That means if you retire at 65, plan to live until you are 95,” Kennedy said.

The second risk is inflation, which happens when inflation erodes purchasing power over time. 

“What costs R100 today might cost significantly more in the future, impacting your standard of living,” Kennedy explained. 

“It’s, therefore, wise to get professional advice on how to ride out inflation safely in the future through sensible and suitable investments that have a track record of delivering inflation-beating growth.”

The third risk is medical risk, as healthcare costs typically rise faster than general inflation, consuming a larger portion of one’s budget as one ages. 

“It’s important to set aside funds for future medical needs, including enough to cover rising medical aid costs as you get older,” Kennedy said.

Managing risks

Kennedy said that to navigate these phases and risks, strategic planning is vital. He provided some expert tips on how to mitigate these risks and better prepare for retirement –

• Take a balanced investment approach

“Your investment strategy should evolve with your age. In the early years, a high proportion of your investment strategy should comprise growth-oriented investments,” he said. 

“As you age, shifting a portion of your investments to shorter duration and more conservative asset classes should help to protect your assets from market volatility.” 

However, he warned investors not to be too risk-averse with their investment strategies, as this risks their money not growing at the rate required to sustain their needs. 

“To manage inflation and ensure long-term sustainability, maintain a portion of your portfolio in growth assets, like equities,” he said. 

“These investments help counteract the effects of inflation but should be balanced with stable assets like bonds and cash to manage volatility.”

• Budget for each phase

Kennedy suggests mapping out your expected expenses for each phase of retirement. 

“Consider your current lifestyle and how it might change. For instance, budget for travel and leisure in the active phase and allocate more for medical expenses in the supported phase,” he said.

• Do the math

Kennedy provided a simple savings calculation to work out how much you need for retirement.

If you plan to retire at 65 and want to maintain the lifestyle you became accustomed to when you earned R100,000 per month, you might need 200 to 250 times that amount in savings, totalling around R20 to R25 million, to sustain your needs until the age of 95.

• Minimise your debt

Kennedy said it is ideal to enter retirement with as little to no debt as possible. 

“It’s advisable to have all your major expenses, including house and car, paid off by the time you retire,” he said.

• Implement a withdrawal strategy

Kennedy said an essential aspect of retirement planning is determining a sustainable withdrawal rate from your savings. 

The ideal drawdown rate is about 4.5 to 5% annually, depending on retirement and age. “This rate should be adjusted based on inflation and your specific, changing financial needs,” he said.