The retirement mistake that could cost you R20 million

Although retirement planning can be daunting, starting early can double your savings and ensure that you have enough to retire comfortably.

Although most investors aim to secure a sustainable income for a comfortable retirement, this is often difficult to achieve.

Many South Africans fall short due to delaying retirement savings, contributing inconsistently, juggling day-to-day financial demands and being overwhelmed by complex decisions.

Studies show that only around 6% of South Africans can afford to retire comfortably. This means that the vast majority of people have to live well below their means, rely on external support, or keep working after retirement age.

“Thinking of retirement as a journey with specific stages can be a helpful way to overcome many of these obstacles,” said Nshalati Hlungwane, Institutional Clients manager at Allan Gray.

Retirement industry veteran Don Ezra delivered a keynote address at Allan Gray’s annual “Through the noise” retirement benefits conference.

Here, he suggested thinking about the retirement journey in three age-related stages. The main aim during the first stage, from around age 20 until the early 40s, is simply to get started.

“Time is crucial in retirement investing – the earlier you start, the better the outcome,” Hlungwane said. “While it may feel like there’s plenty of time early in your career, starting sooner lets you benefit more from compound interest.”

To illustrate this, Hlungwane looked at two fictional investors. Investor A began saving 15% of their R20,000 monthly salary from their first paycheque at age 23 and increased their contributions annually in line with inflation.

On the other hand, Investor B earned the same salary but only began saving after 10 years of working. In both cases, inflation was assumed to be 5%.

Assuming a nominal annualised investment return of 11%, after 42 years, Investor A ended up with 1.9 times (or 89%) more than Investor B at retirement.

Put differently, Investor B had a pension half the size of Investor A. Most of this difference came from compound growth, which is when you earn returns today on returns earned yesterday.

Investors should note that growth is necessary during this part of the journey. “A higher allocation to volatile assets like equities early on can boost long-term returns, but investors must be prepared for short-term ups and downs.”

“Market fluctuations typically smooth out over time – losses only become real if you disinvest out of fear,” Hlungwane explained.

Accelerate your efforts

During the second phase, once investors have typically settled into their careers and relationships, it is time to get serious.

Hlungwane said from the early 40s until about five years before retirement, it is time to hit the gas. “As we mature in our careers and our salaries rise, we typically enter the peak of our accumulation phase.”

“This presents an opportunity to make up for lost time by rectifying any mistakes we made or accounting for any disruptions to our contributions in the first phase of our retirement planning.”

She suggested maximising contributions through your employer or in your personal capacity to get the most from this phase.

“It’s also a good time to adopt an ‘income mindset’ by assessing how your savings translate into a sustainable monthly income in retirement.”

“This helps gauge if you’re on track – and gives you time to adjust your plan if needed. A financial adviser or online retirement calculator can assist with these projections.”

Take the scenic route

The final phase is transitioning into retirement. This phase aims to enjoy the benefits of retirement planning. According to Hlungwane, a successful retirement depends on managing both your finances and your time.

“The five years before retirement are key to reassessing your goals, envisioning how you’ll spend your free time, and evaluating your readiness.”

Some people may choose to delay retirement or explore new income streams; others may pursue passion projects or give back.

“These are personal decisions that require balancing your finances with your vision for a meaningful retirement – taking time to plan makes the transition smoother.”

Counselling psychologist Dr Hannetjie van Zyl-Edeling emphasised the importance of developing a financial portfolio for retirement while also focusing on psychological, health, and social portfolios.

In other words, it is crucial to think about your needs holistically as you plan for the years to come. “Remember that retirement is not the end of your investment journey but the beginning of the next stage of your life.”

“The risks to manage closely at this time are the risk of capital loss, the risk of an investment not keeping up with inflation, and the risk of outliving your income or accumulated savings.”

Hlungwane said that estimating longevity is complex and best tackled with professional assistance. An independent financial adviser can help manage risk and implement an appropriate post-retirement investment drawdown strategy.

“As with any worthwhile journey, starting late – even though it means needing to accelerate harder – is better than not starting at all. Preparing for retirement holistically ensures that it truly will be the enjoy phase of your life.”