This is why you should rethink retirement

It is time for consumers to rethink retirement because we are living longer and current economic pressure as well as the escalating cost of living is making it almost impossible to save enough to retire comfortably. 

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 are evident, Sonja Steyn, head of wealth management strategy at Consult by Momentum, says.

“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 must ask if the roughly 35 years most of us spend working is enough to ensure a comfortable retirement.”

She says this requires a thorough evaluation of the prevailing retirement age range of 60 to 65, particularly when confronting the implications of our prolonged lifespan.

“Thanks to significant advances in healthcare and the adoption of healthier lifestyles, life expectancy in South Africa is increasing. This shift implies that individuals now face the prospect of considerably longer retirement periods that demands a fundamental re-evaluation of how we approach financial preparations for retirement.”

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You can live until 90, but can you afford it?

Steyn says it is 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 your monthly income is probably not enough and therefore, it is 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.”

It is now recommended 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 is probably not feasible for the majority of South Africans, who are already under severe financial pressure, she says.

“For many South Africans, their retirement savings are the only significant savings they possess. Unfortunately, a troubling trend has emerged with consumers choosing to withdraw their pension or provident funds upon changing jobs, making the retirement “gap” even bigger.”

She points out that given this looming crisis, Treasury is implementing a two-pot system to encourage consumers to retain a portion of their retirement savings when changing 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.”

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Is a 35-year working life enough to save for retirement?

Steyn says when determining whether a 35-year working life is enough to provide for a decent retirement, you must consider:

• Inflation because it erodes the purchasing power of your money over time. When planning for retirement, it is essential to account for inflation to ensure that the money you saved will be enough to cover your expenses in the future.
• Debt management and payment before retirement is crucial. High-interest debt can erode your retirement savings and jeopardise your financial stability during retirement.
• Healthcare expenses that tend to increase with age. It is important to consider potential healthcare costs when planning for retirement, including the costs of health insurance and potential long-term care needs.
• Market volatility that can affect your investments. Economic downturns or poor investment performance can affect 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.
• Embracing alternative income streams can help and lifelong learning will enable you 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 when you retire will determine how much money you must save. Some people may want to travel extensively, while others may prefer a more conservative lifestyle.

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Decent retirement depends on your choices

“Ultimately, whether a 35-year working life is enough for a decent retirement depends on your unique circumstances and choices. It is advisable to work with a financial adviser who can help you to create a comprehensive retirement plan that takes your goals, assets and liabilities into account.”

Steyn says you must also remember that your circumstances can change over time and therefore it is essential to regularly review and adjust your retirement plan as needed. “Move beyond mere retirement savings to include a broader financial plan.”

For this broader financial plan you must 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 your retirement savings.”

In essence, Steyn says, 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 requires a multidimensional approach to retirement planning. By tackling 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.”