Investec retirement warning

Experts have warned that a lack of retirement planning can leave South Africans living on a fraction of their pre-retirement income, relying on family for financial support, or having their savings wiped out by a single emergency.

This was explained by Investec’s co-head of My Investments, Kate Robson, and head of adviser enablement, Johan Loubser, on the Everything Counts podcast.

Worryingly, an Alexander Forbes study revealed that the average South African can only replace about 31% of their income with retirement savings. To retire comfortably, the replacement ratio needs to be closer to 75%.

For example, this means that if an average South African buys one coffee a week pre-retirement, they will only be able to buy one coffee every three to four weeks during retirement.

“That’s the impact if you don’t have enough retirement savings,” Loubser said. “That shortfall shows us why preserving capital and maintaining growth is so important.”

A key part of making sure someone has enough saved for retirement is engaging with a financial advisor who can help craft a savings plan.

Robson explained that an advisor can help create a retirement savings plan, optimise tax-efficient investments, and discretionary investments, which are crucial for liquidity.

Planning with a financial advisor around the event of retirement should start about five to seven years before someone stops working, Loubser advised.

This will establish where the client’s funds are currently invested, where they will generate income after retirement, whether they will receive any lump sums, and what level of liquidity they will need after retirement.

If any adjustments need to be made before retiring, the client will also have enough leeway to make changes.

South Africans who provide financially for dependants, like spouses or children, also need to take that into account before they retire.

This includes having discussions with these dependants around whether the support will continue, planning for these extra expenses with a financial advisor, and putting extra money into savings.

Not taking these measures before retirement could easily lead to a situation where someone depletes their own savings to take care of their dependents.

Retirement

Upon retirement, South Africans move from accumulating funds to reach a certain goal to decumulating, which means that spending and saving patterns will need to change.

Although retirees may not be saving as much as they did before, they still need to manage their funds so they are able to afford certain necessary and discretionary expenses, like vacations or new cars.

Robson and Loubser emphasised the importance of meeting with an advisor at the time of retirement and ensuring that the amount being drawn from investment savings is sustainable for the next 20 to 30 years.

“With that in mind, you need to align with your financial advisor,” Loubser said. “They need to understand your goals, your objectives.”

“It’s important to have an open conversation with your advisor and get to a point where you both know what’s going to happen in retirement.”

Investment approaches also change at the retirement stage, since the portion of retirement investment being drawn as income needs to be derisked.

However, Loubser said savings that will remain in place for over a decade can remain in higher-risk investments that yield higher returns.

From a lifestyle perspective, Robson said retirees also need to consider health and longevity risks. This includes risks such as critical illnesses, which become more likely as people age.

People also need to consider the cost of medical aid, which significantly increases in cost as people get older, and rises at a faster rate than inflation.

These costs should be properly accounted for in the planning process to ensure that retirees do not have to draw on their investments.

Mitigating risks

South Africans also need to consider where they will live once they retire and who will care for them, as retirement homes and care can be quite expensive, Robson warned.

“If you are living longer than your spouse, potentially longer than your children, who’s going to care for you? Where are you going to be? Is it going to be adequate? That’s a real worry,” she said.

Loubser said investing in protections such as gap cover, the appropriate medical aid, and travel insurance can also help protect South Africans from risk.

“What you don’t want is a single medical event wiping out your savings or your discretionary funds that were intended for future use for other things that you do want to do in retirement,” he said.

While retirement may feel like the end of the line for investors, this isn’t the case. “Retirement isn’t a full stop. Investing doesn’t stop there, planning doesn’t stop there,” he said.

Loubser stressed that retirement is not only about investment portfolios, as there are many other factors people need to consider.

“In retirement, you still need to make these decisions. You still need to consult with your financial advisor, your fiduciary specialist,” he said.

“Lastly, stay invested and stay informed. Things change. Twenty to thirty years is a long time. You want to make the best out of those years, but you also want to stay informed, and your plan needs to evolve with any changes that happen.”