Sonja Steyn, Head of Wealth Management Strategy at Consult by Momentum, shares why we should be rethinking traditional retirement in a rapidly changing landscape
The retirement landscape in South Africa stands at a pivotal juncture, requiring innovative strategies that respond to these changing dynamics. As we navigate this uncharted territory, a multitude of crucial considerations come to the fore.
In the midst of shifting demographics and evolving economic conditions, the effectiveness of traditional retirement planning strategies is under scrutiny. As we navigate this changing landscape, we need to interrogate whether the roughly 35 years most of us spend working is enough to ensure a comfortable retirement. This necessitates a thorough evaluation of the prevailing retirement age range of 60 to 65, particularly when confronting the implications of our prolonged lifespan.
In light of significant advancements in healthcare and the adoption of healthier lifestyles, life expectancy in South Africa is experiencing an upward trend. This shift implies that individuals are now facing the prospect of considerably longer retirement periods, thereby demanding a fundamental reevaluation of how financial preparations for retirement are approached.
It’s important to acknowledge that life expectancy might extend to as much as 90 years, which implies preparing for a retirement period that could span around 26 years or more. This brings us to a critical point: the current retirement contribution rate of 15% of one’s monthly income is likely not adequate. Therefore, it’s advisable to consider increasing the contribution rate of your monthly earnings to align with these evolving realities. Your future financial well-being is at the heart of this adjustment.
Recommendations are that you contribute 30% or more of your monthly earnings towards retirement, which is certainly a wise goal for ensuring a secure retirement, although it’s probably not feasible for the majority of South Africans, who are already under severe financial pressure.
For many South Africans, their retirement savings are the only significant savings they possess. A troubling trend has emerged, which sees individuals choosing to withdraw their pension or provident funds upon changing jobs, making the retirement “gap” even bigger.
Given this looming crisis, Treasury is implementing a two-pot system. This approach encourages individuals to retain a portion of their retirement savings when transitioning between jobs, with the overarching goal of preserving a financial safety net for their later years. Although this is a commendable step, it still may not adequately address the broader retirement challenges we face.
When determining whether a 35-year working life is enough to provide for a decent retirement, you need to consider the following factors:
Inflation – this erodes the purchasing power of money over time. When planning for retirement, it’s essential to account for inflation, thus ensuring that the money you’ve saved will be enough to cover your expenses in the future.
Debt – managing and paying off debt before retirement is crucial. High-interest debt can erode retirement savings and jeopardise financial stability during retirement.
Healthcare expenses – these tend to increase with age. It’s important to consider potential healthcare costs when planning for retirement, including the costs of health insurance and potential long-term care needs.
Market volatility – be aware that your investments are subject to market fluctuations. Economic downturns or poor investment performance can impact your retirement savings. Factors such as the percentage of your income that you save, the returns on your investments, and the compounding of your savings over time are all important considerations.
Embrace alternative income streams – lifelong learning will enable yourself to engage in part-time work or entrepreneurial ventures. The concept of a ‘side hustle’ or alternative income stream is gaining prominence as a strategy to supplement retirement funds. Retirees might need to engage in additional work or entrepreneurial endeavours to sustain themselves and prevent the premature depletion of their retirement savings.
The lifestyle you want – your desired lifestyle in retirement will impact how much money you need to save. Some people may want to travel extensively, while others may prefer a more conservative lifestyle.
Ultimately, whether a 35-year working life is enough for a decent retirement depends on the individual’s unique circumstances and choices. It’s advisable to work with a financial adviser who’ll work with you to create a comprehensive retirement plan that takes your goals, assets, liabilities, and the factors mentioned above into account.
Keep in mind that circumstances can change over time, so it’s essential to regularly review and adjust your retirement plan as needed. Move beyond mere retirement savings to encompass a broader financial plan. Consider investments, real estate, and other assets that can contribute to a more secure retirement. Explore diverse investment options that offer potential for growth while managing risk. Diversification can help mitigate the impact of market fluctuations on retirement savings.
In essence, the retirement paradigm in South Africa is evolving from a model based on a retirement age (which is fast becoming outdated) and fixed savings, to one that emphasises flexibility, supplementary income sources, and realistic contribution rates.
The challenges of financial strain, inadequate savings, and shifting demographics necessitate a multidimensional approach to retirement planning. By addressing these challenges head-on and fostering a more holistic perspective on retirement, South Africans can pave the way for a more secure and dignified retirement.