Allan Gray warns of big risk to retirement savings

South Africa is facing a retirement crisis, with most people unable to retire comfortably, making it essential for people to prevent lifestyle inflation from derailing their retirement plans.

This is feedback from Allan Gray’s communications manager, Twanji Kalula.

Several factors, such as the cost-of-living crisis, geopolitical tensions, the energy crisis, and inflation, make it difficult for South Africans to afford retirement.

Data collected on over 300,000 Sanlam retirement fund members revealed that while the official retirement age remains 65, most people can only afford to retire at 80.

This is mainly due to inadequate savings during their careers or higher-than-expected spending during retirement, meaning their savings do not last and are insufficient to sustain their lifestyle.

According to Kalula, the detrimental effects of lifestyle inflation, which are often overlooked in retirement planning, also exacerbate this situation.

“As investors, we may not be able to control whether rates go up or down or how rapidly consumer inflation rises and falls, but we can improve our long-term financial prospects by carefully controlling our lifestyle creep,” he explained.

“Simply put, lifestyle creep is the increase in our expenditure as we earn more money. Unfortunately, it tends to work against us, but on the upside, in contrast to inflation, it is largely within our control.”

This can happen gradually through small spending increases over a long period, but it could also occur as the result of a major life change, like having a family, or after a major purchase, such as a house.

“While a degree of lifestyle creep is expected as we earn more, additional cash flow is often channelled entirely into funding new expenses, with little consideration for long-term investment goals.”

“As products and services that may have been considered aspirational or out of reach become increasingly affordable, they may begin to feel like necessities – fuelling lifestyle creep.”

“This impacts the amount we have available for saving and investing and therefore erodes our ability to build wealth.”

Kalula said one problem with lifestyle creep is that people often fail to account for it when projecting how much money they will need to retire comfortably.

“We can unwittingly end up spending more on lifestyle-related expenses during the accumulation phase of our lives at the expense of saving enough to fund our expenses in retirement.”

“Adding further complexity, lifestyle creep may also drive up the amount of money we will ultimately need to ensure a comfortable retirement – depending on what we envision for this phase of our lives.”

When deciding how much to save for retirement as a percentage of regular income, Kalula explained it is essential to take personal circumstances into account.

“We need to consider our age at the time we start saving – i.e. the amount of time we have to save – and the amount of money we will need to have accumulated by the time we retire. The longer we wait to save adequately, the more we need to save.”

“As a rule of thumb, we should aim to build a nest egg that is large enough to replace 60-70% of our income in retirement.”

“This will ensure that we will be able to sustain a comfortable retirement, bearing in mind that the nature of our expenses is likely to change as we get older.”

However, people often only calculate this amount when they first start investing, which means that this calculation will not account for the effects of lifestyle creep.

As a result, many people will end up not saving enough for retirement, Kalula said.

“An unwieldy lifestyle creep can result in our expenses outpacing our income. At first, we may find ourselves living from payday to payday, but left unabated, many of us then fall into a debt spiral to sustain our ongoing lifestyle costs.”

“The compounded cost of expensive debt further fuels lifestyle creep and is one of the reasons many investors never meet their long-term financial goals.”

How investors can avoid the lifestyle inflation trap

Fortunately, there are a number of things that can be done to avoid falling into this lifestyle inflation trap, Kalula added.

First, to keep the lifestyle creep in check, it’s essential to track expenses and manage overheads by monitoring monthly spending, comparing costs, and making informed financial decisions that balance present needs with future goals.

Avoiding overspending during good times is also crucial because when money feels more abundant, such as during periods of low interest rates, it’s easy to fall into the trap of increasing expenses.

Keeping costs steady during these times helps smooth out financial ups and downs.

Using windfalls wisely can also prevent lifestyle creep, Kalula explained.

Instead of increasing fixed expenses, like upgrading to a more expensive car, consider using unexpected income to boost savings, investments, or retirement contributions.

Regularly reviewing and adjusting savings targets ensures long-term financial security is also key to ensure that as income grows, your savings, rather than spending, grow with it.

Investing wisely is another key strategy – choosing funds that consistently outpace inflation and offer balanced risk across different asset classes can help secure financial growth.
Finally, Kalula noted that regularly reviewing and updating your financial plan is essential to avoiding lifestyle inflation.

“A well-considered financial plan, which is revisited regularly to account for changes in personal circumstances, provides an invaluable road map as we work towards achieving our long-term investment goals.”

“It also provides a disciplined spending system that can aid in purchasing decisions and can go a long way in keeping lifestyle creep at bay.”