Retirement is a bit like that, vague and distant at first, shrouded in an undefined, improbable future that, almost imperceptibly, draws nearer every year until it suddenly looms just ahead.
In that famous scene Lawrence stood and watched. Don’t do that. Consider your options while you have time to act. Even if you did not get off to the best start with your retirement plan there are steps to take in your Fifties and onwards to make the best of your situation. Leave it too late and you run the risk of becoming captive of your circumstances, rather than in control of them.
Are you on track to a comfortable retirement?
By the time you reach your half-century, your formerly vague notions of retirement should have a fairly sharp outline. You know who you are and have a sense of how you would like to spend your Golden Years. You will have settled into a particular lifestyle, with an appreciation of its monthly cost.
Rather than relying on a rule of thumb (such as a minimum income replacement ratio) you are now in a position to draw up a reasonably detailed budget covering your essential costs: accommodation, food, healthcare, insurance, transport, communication and entertainment. Beyond that, you need to factor in travel, recreation and personal development goals. You should also make an allowance for emergencies and capital purchases.
Doing this will help you define your savings goal, which is the amount of money you need to sustain your lifestyle in retirement.
The critical question is: will you have enough saved up come your last work day to sustain this lifestyle? Tools such as the 10X Retirement Calculators will help you project your sustainable retirement income, and whether you are on track to reach your goal, based on your current savings and savings rate, as well as your current investment strategy.
What can you do to improve your retirement outcome?
Don’t despair if your projected retirement income doesn’t match your lifestyle goal. With 10 or so years to go, there is still scope to improve your outcome. This includes saving more aggressively, or delaying your retirement.
It’s true that retirement saving is a long-term game and it pays to start young. But you can still make a big difference by super-saving over the last 10 years. If you are lucky, the Fifties are a time when your cashflow frees up because children leave home and your bond repayments become immaterial.
Rather than ratchet up your lifestyle now, plough more money into your retirement fund. By doubling your savings rate over the last 10 years, you could boost your pot by 15% (and by much more if you started saving late).
Also, look to improve your investment return. Plan fees might look like small numbers, but they add up in a big way over many years. If you could save just 1% in annual investment fees for 10 years (for example by using index funds rather than actively manged funds), you could boost your retirement pot by 10%. Learn more about the difference between active and passive investing in this video.
Another way to improve your situation is to postpone your retirement. This would mean saving and earning compound returns for additional years, and you would have to rely on these savings for fewer years.
But you also need to be realistic and accept that within your timeframe you can only improve your prospects so much. You are not likely to catch up on decades of under-saving, so you may have to scale back your expectations. The sooner you become aware of your shortfall and start making those downsizing changes, the more you can add to your savings and the less painful the adjustment will be.
The 10X Retirement Calculator can help project different outcomes if you change your retirement age, contribution rate or desired income.
What are your post-retirement product options?
Your retirement income will not depend just on the amount of your savings, but also on what you do with your savings when you retire.
As a member of a pension or RA fund, you must use at least two-thirds of your fund proceeds to purchase an annuity (unless the fund value is less than R247,500). You can choose between a living or guaranteed (life) annuity. With a provident fund, you also have the option to take the whole amount as cash, net of tax.
A life annuity pays you a guaranteed monthly pension for the rest of your life. It’s a form of insurance that protects you against poor investment returns as well as the risk of out-living your savings. One downside is that no money passes on to your heirs.
Alternatively, you can transfer your retirement fund savings into another investment product called a living annuity. This enables you retain control over your money, but you also assume the risk and responsibility of securing an adequate income for the rest of your life. In return, you have more income flexibility and your heirs inherit any residual capital.
The 10X Post-Retirement Calculator can help you project the sustainable income you could expect from either a living or a life annuity, based on your circumstances.
Deciding between the two has income, tax, estate planning and risk implications, so you should give yourself enough time to decide on the solution most appropriate for you. In the case of a life annuity you cannot change your mind later on.
Read more in "Living annuities vs. guaranteed annuities".
What should your pre-retirement investment strategy be?
Another reason you should take an early view on your post-retirement product is that this will inform how you should invest your savings until then.
If you pick the living annuity, you will control your savings and how they are invested. In that case, you want a smooth transition from one product to the other, without exposing yourself to timing risk around your retirement date. If you plan to move from a high equity to a low equity portfolio post retirement, you don’t want to remain in a high equity portfolio right up to your retirement date, lest you get caught out by a stock market correction just before that time. Such a shock would permanently decrease the value of your nest egg.
Instead, approach your desired post-retirement asset mix (essentially high, medium or low equity) in stages, over a few years leading up to your retirement. This is called an investment glide path.
Be aware, though, that if you retire at age 65, you still have a statistical life expectancy of 15 to 20 years. You are still a long-term investor and should consider following a high equity strategy even post-retirement. In the long run (five years or more), a high equity portfolio is likely to generate the highest return despite greater return fluctuations. In that case, you would remain invested in a high equity portfolio pre-retirement; even if there is a market crash around your retirement date, you would not lock in those losses, because you would ride the subsequent recovery in your living annuity.
But if you plan to cash out your savings or buy a life annuity, then your investment horizon is set by your retirement date, and you should follow a life-stage approach that gradually lowers your exposure to market risk (equities) in the run-up to this date.
Bottom line
Even if your pension provision ran on auto-pilot for most of your working life, now is the time to engage positively and proactively. This is the time to get your bearings on where you stand financially, and to take possible corrective action to improve your savings outcome. It is not too late to make a worthwhile difference.
This is also the time to firm up critical decisions relating to your post-retirement income product and lifestyle, and to line up your portfolio and spending accordingly. Entering your retirement years should be a smooth transition, not a jarring experience, either financially or existentially.
The sooner you inform yourself, the more options you have. Ignore it to the end, and you could take years off a comfortable retirement.
