A shorter working life, lower expected future returns and lower incomes in retirement mean that pensions need to last much longer than previously anticipated, says the writer. (Photo: Rawpixel)
Many people in retirement simply neglect to continue planning. They see their retirement date as an end to planning for their future. It is a new journey, but a more difficult one as mistakes must be avoided. The Covid-19 pandemic and the Zuma years of government prove this.
Bruce Lee, a Hong Kong actor, martial artist and philosopher once said:
“A goal is not always meant to be reached, it often serves as something to aim at.”
This quote was used by retirement planning financial adviser, Estee Visser, in a Linkedin post, who then also added one of her own:
“If you reach your goals, you’re not trying hard enough.”
The first question you need to ask is: Do I want to retire?
There are many reasons why you may want to or need to avoid retiring. Alexander Forbes research on what is called “normal retirement age” shows that reasons given by employees are often not logical.
In research done in 2013 and again this year by Alexander Forbes principal consultant, Belinda Sullivan, it was found that the challenge to retirement age is not so much the Pension Funds Act, but employers, who incorrectly see the cost of extended retirement as a perceived issue.
At that time the average retirement age was 61.4 for 2019 (up on 60.3 in 2012) showing some improvement. But it still means that most people will still be retiring early, for whatever reason as the average normal retirement age for private retirement was 63.
Sullivan says the reality is that individuals are retiring earlier, but the irony is individuals have more time to live, but less time to save — a shorter working life, lower expected future returns and lower incomes in retirement, which now means that pensions need to last much longer than previously anticipated. Sullivan says individuals now need to work as long as possible to fund their lifestyles post-retirement.
More than half of the 37 countries that make up the Organisation for Economic Co-operation and Development (OECD) have increased the retirement age from 65 to 67, with the longer-term intention to increase this age beyond 67 to target 75 by 2050.
Sullivan says arguments in South Africa for later retirement include:
- Evidence suggests that people who work later are least likely to die early. However, certain jobs do not lend themselves to later retirement.
- Increasing retirement age or retiring at 65 rather than 55 can almost double a member’s replacement ratio. Retiring four years earlier means a reduction of about 10% in post-retirement income. This is significant given that the average replacement ratio at retirement is 26.7%;
- members with longer service, say 30 years or more, can expect higher benefits at retirement. A total of 53% of members with 35 years’ service or more achieved a replacement ratio of 60% or more;
- There are often skills shortages, which makes the pool of skilled potential retirees quite valuable;
- Employees are more likely to remain loyal if they can see benefits;
- Depending on the industry, individuals can add value well beyond their current normal retirement ages. Extending the retirement age keeps the knowledge and experience in the business and can be used to mentor and up-skill the younger generations;
- Employee engagement is an integral part of having a successful business. Companies with higher levels of employee engagement tended to outperform those with lower levels of engagement;
- Younger workers may view this as a positive where they will be able to grow and mature within the business;
- To attract and recruit younger skilled employees to fulfil a higher-level position may not result in a saving to the employer as they may leave before retirement;
- There is mixed evidence as to how age influences productivity, if at all. Some studies show that productivity declines with age; others show that older workers tend to be better in terms of accuracy and output consistency. Then there are studies showing that there is almost no relationship between age and productivity; and,
- A comparison of retirement ages and youth unemployment rates shows no real relationship between the retirement age adopted by workers and youth unemployment
Listed below are some of the most common situations that might apply to your decision-making on when to retire:
- If you owe money, do not see the amount you may commute from your retirement fund as a way to get rid of debt. You should be rid of debt by the time you retire, without using your retirement savings. You will be far more likely to run out of income if you use your retirement savings to pay off debt.
- If you are struggling to pay your day-to-day living costs, you are likely to receive less as an income in retirement, making your situation worse.
- Try not to retire on a replacement ratio of less than 60% of your last pay cheque. Ideally, that replacement ratio should be between 100% and 120%.
- If you haven’t planned for your retirement, you may need more time to do so. Retirement fund counselling (provided by your retirement fund) will help you, as will advice from a well-trained financial planner. You must look at everything, from your income in retirement and keeping an emergency fund, to where you want to live and dealing with extra expenses like replacing your refrigerator. This should be done (at least in rough form) no fewer than five years before retirement. It is important that you have a monthly budget for how much you will spend in retirement. It is only by knowing how much you will spend that you will know how much income you will need.
- If you are running your own business, you must work out who will manage it, through to how much income you will get from selling it. It is not likely that right now would be the right time to sell a business – depending on what it is.
- Think about the extra costs of healthcare in retirement, from gaps in any medical aid to the chance you might suffer from dementia and require professional care.
- Think about what you want to do in retirement. You can’t fish every day. Many retirees get very bored very quickly if they have no alternative interests they want to pursue. Think about your relationship and the effect of spending every day with your partner. If you still love your job, you may want to continue working as a consultant in your retirement, even if you don’t need the money.
- Consider each decision you take, as you may not be able to undo them five or 10 years into retirement.
- Plan for a long retirement. Don’t rely on the average age of death. Plan to live until at least 100.
If you don’t have a choice on your retirement date and haven’t saved enough to retire confidently, what do you do? Many people are forced into retirement by retrenchment, illness, infirmity or the date specified by their fund. Here are five things that you need to consider:
- Can you restructure your finances to take advantage of the government’s Older Person’s Grant? For some people this is the only option, no matter how low it is. The maximum amount you will get is R1,860 per month if you are aged 60 or older. If you are older than 75, you will get R1,880. To qualify, you must not earn more than R78,120 if you are single or R156,240 if you are married, and you must not have assets worth more than R1,115,400 if you are single or R2,230,800 if you are married. About 70% of the elderly receive this grant.
- You have human capital: your expertise. Your labour is part of your retirement package. Get out there and look for something else to do. Don’t lose sight of your target, even when faced with rejections. Keep trying. It costs nothing to write a letter.
- You will need to restructure how you spend your money, drastically in many cases. First of all, get rid of expenses that aren’t essential, like going to restaurants or movies. A daily walk is often better and is free. Once you’ve done that, sit down and take another look at what you consider essential spending, such as your food, clothing and where you live. With a car, you could very well be better off selling it to avoid paying insurance, fuel and other costs and simply using Uber instead.
- Keep in touch with your broader family and friends. They might be able to help you, but only if you treat them well from early on. And you can consider things such as sharing a home with friends or family; hiring out a room on Airbnb (when Covid-19 ends); or using a granny flat, even if it’s in return for something such as babysitting or gardening. Your children might buy your home and then fund you in return, particularly if the sale takes place at the lowest possible price in tax terms, or you might use a child as a tax-free occupant.
- If you are going to downsize your accommodation, investigate the various options in retirement villages. The decision of when to sell your home and what structure to buy into may be one of the most important you make. You don’t want to be a forced or desperate seller of a property in response to a life emergency, which could cost you 20% of its value, and then become a forced buyer into alternative accommodation without full investigation – doing so could cost you the same on the other side of the transaction.
- There are other options. You could speak to your bank and your financial adviser about getting a reverse mortgage on your home, where they lend you money and then eventually get possession of your home.
There are many ways to find new job opportunities. For example, there is an online company called 50 Plus-Skills and Retirement Network that has built a community where people aged 50 and over can profile their skills and promote their services to others.
Lynda Smith, the managing director, says that the Covid-19 virus has created unprecedented times.
“This is a scary and difficult time for people over the age of 50, who are losing their jobs and who cannot afford to be retired early or retrenched. There are also people, like restaurant owners, who are now out there looking for jobs as well.”
The aim of 50 Plus-Skills is to help people in this age bracket to continue to live their lives fully.
“We want to urge people of 50-plus to find new ways of working, connecting with and providing their wisdom, experience and skill to business, civil society, academic institutions, non-profit organisations and government,” says Smith. “Some people still need to earn extra money. Some simply want to work with many doing a lot of volunteer work.”
You can join the network, which gives you the following benefits:
- a place to market your profile and what you are looking for or offering;
- the opportunity to attend an online workshop on retirement life planning up to five years before retirement;
- the ability to engage with organisations, individual members and others in your community; and
- online learning that allows you to earn, learn and serve.
The opportunities are incredibly wide. Such websites provide opportunities for mentors (both paid and unpaid) to help people in incubator or enterprise developments, supporting and coaching; or providing technical skills in various industries; or facilitating workshops to develop skills; or be part of a team of advisers who nurture and support young people. DM/BM
A series of reports written by Bruce Cameron, the semi-retired founding editor of Personal Finance at Independent Newspapers, that cover the effects of Covid-19 on pensioners including research undertaken by Alexander Forbes on retirement income in South Africa. Cameron is co-author of the best-selling book, The Ultimate Guide to Retirement in South Africa.