Golden rules for a successful retirement

SIKI MGABADELI:  Without a proper retirement savings plan most South Africans will not be able to sustain their accustomed living standards in retirement. People may well work longer in the future, but they will still have to retire at some point. It is important to plan for this. So today we are going to talk through some of the golden rules for a successful retirement plan.

We are joined now by Jenna Hartley, who is investor consultant at 10X Investments, as well as Wayne McCurrie, who is with Momentum Wealth.

I’m going to speak to Jenna in a moment but, Wayne, just your thoughts on this whole retirement thing? We keep banging our heads and saying please make sure that you are saving, you are saving, you are saving. And yet we still have such low savings in this country.

WAYNE McCURRIE:  Look, we run the Momentum Financial Wellness index. Just roughly speaking, I think the number of people who are truly secure in their retirement is virtually single-digit as a percentage.

At the end of the day retirement is getting a plan, doing your investments. But the two biggest factors by far are sticking to it and time. You’ve literally got to start from your first pay cheque, and you’ve got to put, I don’t know, 15% of your earnings, 20% of your earnings away. But, as you said earlier on, the biggest thing by far, no matter where you find yourself, is don’t make it worse – save.

SIKI MGABADELI:  Save. Jenna, do you find that we underestimate what we are going to need at the time of retirement?

JENNA HARTLEY:  I think for most people it’s much of an abstract concept because it’s so far away and we are all very busy doing what we need to do today, living our lives, buying houses, going on holidays, having a job. And I think people underestimate how quickly, actually, retirement does approach. But more to the point, if I were to ask you how much monthly income you will need in retirement, have you got a quick answer?

SIKI MGABADELI:  No.

JENNA HARTLEY:  That’s where most people are. They haven’t intentionally sat down and said, how much do I need. Even if it’s just looking at what you are currently earning and saying, okay, if I paid off all my debt by the time I retire, can I live off my current salary? Because once you’ve actually intentionally sat down and thought about that number, it’s very easy to work back and put a plan in place, especially if you do it when you are young because you’ve got time on your side. And then the number that it tells you to save is actually quite doable.

But once you start leaving it too late, the number that calculation tells you also then becomes quite impossible to implement.

SIKI MGABADELI:  Another concern, of course – and this is something that the government and Treasury have been trying to tackle – is changing jobs and cashing in, or cashing in your pension situation. Why is that dangerous?

JENNA HARTLEY:  Well, every time you cash in you are basically starting from scratch again. So, if we listen to Einstein, he said that compound interest is the eighth wonder of the world: he who understands it earns it, he who doesn’t pays it.

Basically when you cash in you are starting from scratch and your time horizon [alters]. If I’m cashing in when I’m 30 I’ve got 30 years left, if I cash in when I’m 40, I’ve got 20 years left. So every time I am reducing the compounding effect of my money which is earning returns on returns.

SIKI MGABADELI:  And that, Wayne, goes into the issue you raised around time. The longer you are in –

WAYNE McCURRIE:  The better you are off ultimately. Look, to me there are obviously some golden rules of retirement. You choose a retirement vehicle that’s very well diversified, and you don’t try a get-rich-quick type of thing. If you are very young – and very young is probably lower than 35, 40 – you invest virtually all your money in shares. The moment you get older you take less of a risk.

When you retire you take out an annuity, because you don’t know how long you are going to live. At least with an annuity you will get paid until the day you die. Whether it’s in five years’ time or 40 years’ time, you will get a certain amount of money coming in.

Try and get your debts down. All of this is very much common sense. Everyone has heard it before. But it’s not always easy to implement because we are humans, we are not machines. We say, ooh, what about a holiday, what about buying a new car, or what about a new house. People are faced with emergencies.

There is just no other option. That’s it. You’ve just got no alternative. But, as we spoke about earlier on, no matter what situation you are in now, you can at least start trying to take the right steps. And if currently you can’t afford to pay for retirement, you are simply living beyond your means. You have to cut a lot out, you’ve got to change your current lifestyle to make money for retirement, whether that’s downscaling your house or downscaling your living expenses or downscaling anything. Because, certainly in South Africa, and even more so worldwide, the government is not going to look after you.

SIKI MGABADELI:  So you seriously have to look after yourself. And we all know when the budget comes around and you hear the amount that the state pension is, it breaks my heart because how many of us can actually afford to live on that small amount?

WAYNE McCURRIE:  You can’t.

SIKI MGABADELI:  Jenna, let’s talk about retirement vehicles. What advice would you say [give] when someone is deciding where to invest for retirement?

JENNA HARTLEY:  If we can at least get to the point where they decide that they are going to put, say, R1 000 away per month specifically for retirement, then the best vehicle for that would be a retirement annuity fund because of the tax benefits. And then within the various retirement annuity funds within the industry what you want to try and do is basically minimise your fees for that product to less than 1%. Then have a high equity-backed portfolio underlying that retirement annuity fund.

SIKI MGABADELI:  And fees?

WAYNE McCURRIE:  Fees are very important. Fees have come down in the last ten years, probably twofold. They’ve probably halved and halved again over the last ten, 15 years.

But fees are important. To me, as long as you save in a product and get your fees down, you can actually do incredibly well. I’ve got no objection with people over the very long term investing maybe in some sort of index-tracking fund, because they are very cheap. Even though I’m in the active-management game there is no problem with an index tracker, as we’ve said ten times now, as long as you are doing something. You know, a 1% drop in your fees over 50 years or 30 years, or whatever the case is, is a lot of money. A 1% per year compound is massive, actually.

So choose something that’s good. I’m in the industry, so obviously I’m going to say this. If you don’t feel competent in your own ability to look after it, get an advisor, go talk to someone who knows more than you know about it, etc. But just do something.

SIKI MGABADELI:  Jenna, you’d agree on at least getting advice and getting someone to sit down and look at your individual circumstances, because we all have different and unique circumstances.

JENNA HARTLEY:  Siki, in our environment we have actually simplified this whole thing to the extent that one doesn’t really need an advisor. It’s a solution but it’s [something] very simple being offered. Then the consumer is not overwhelmed and needing to make a lot of choices or decisions around how to invest the money, etc.

However, if people are struggling to just get to the point of understanding how much to save, where to put it, etc, then definitely a financial advisor can add value there by at least just starting the process for the person and guiding them to the better products in the industry.

SIKI MGABADELI:  It’s important to start to have this conversation. Thanks, Jenna.

Wayne, savings are so important. We talk about saving and we talk about investing. Is there a difference between the two?

WAYNE McCURRIE:  No, there is no real difference between the two. Normally you’d use the terms “savings for retirement, savings and investing” to try and do something more than just your retirement saving.

But with the new tax changes that have been made, you can invest 25% – I think I’m right here – of your income subject to a maximum of R350 000 with a tax deduction, and then you’ve still got the R50 000 a year subject to a R500 000 tax-free income account. But on your pure retirement you can do up to 25% and you get a full tax deduction on that. If you are, for example, at higher income levels, the government is actually paying 40% of your contribution because you are not paying tax on it. That’s a tremendous thing.

A lot of people used to be using 15, 18% of their retirement income – and now it can go up to 25%. So if you had your retirement [money] and you had separate investments, but you are not using your full 25%, it’s best to actually go to the full 25%, even if you stop with the other investments, because there is a huge, huge tax advantage to this.

SIKI MGABADELI:  We’ll leave it there, Wayne. Thanks for your time this evening.

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