Planning for retirement during different life phases

Recently I took a few days off to visit Hermanus and with the Whale Festival that’s just passed, this little town was bursting at the seams.

Visitors range from toddlers to graceful retirees, all of whom enjoy the festival equally. It’s in exactly these different age groups that I broadly place these people into three main categories, namely: “those who have to”, “those who would like to” and “those who already have”.

The first group usually consists of younger individuals who just started working and who live in Hermanus because that’s where they could find employment.

The second group usually consists of middle-aged individuals who utter the phrase, “I would love to retire here someday,” more than “Look, a whale!”

The last group consists of those who have already retired and now live in Hermanus permanently.

I’m well aware of the fact that no two people are alike, but there are a few golden threads we can all relate to during the different phases of our lives, especially when it comes to saving for retirement.

20s: In your 20s you should focus on paying off any outstanding debts, such as overdraft facilities, credit cards, study loans, etc. Saving is usually one of the toughest tasks during your 20s, but it shouldn’t be postponed. Save as much as possible.

Let’s use Mr A and Mr B as an example, both of whom are aged 25 at the start of this experiment. Mr A manages to save R500 per month with great difficulty at a fixed growth rate of 8% per year, but he only does this for 10 years (until age 35), after which he stops contributing and leaves his savings to grow until his retirement of age 65.

Mr B postpones his savings until age 35, when he starts to save R500 per month for 30 years until he reaches retirement at age of 65. At first glance, you would think that because Mr B saved significantly more (R500 a month for 30 years) than Mr A (R500 monthly for only 10 years), that his savings should be considerably more than Mr A’s at retirement age, but that’s not the case.

Mr A would have saved around R1m by the time he retires by following his savings strategy, which is quite a bit more than Mr B’s R750 000. What we learn from this is how important it is to start saving as soon as possible, irrespective of how much or little you can afford to put away. Clearly it makes a huge difference to your savings’ total.

30s: In your 30s, it may be necessary to shift your focus slightly towards the possible purchase of a home, or perhaps expanding your family. Monitor your debt carefully and make sure that you are making good progress in paying it off. As in your 20s, saving remains important and you should strive to save between 17% and 20% of your personal monthly income.

This is also a good time to join your company retirement fund if you haven’t already, or to invest in a personal retirement annuity. Both of these products have wonderful tax benefits, which you need to take into consideration when evaluating your personal tax situation.

Other long-term investments, such as saving for your children’s school fees and tertiary education, should also be considered at this stage. Products like endowments have become extremely cost-efficient in recent years, while the introduction of tax-free investments have made saving even more convenient.

40s: In your 40s, your focus should firstly be on becoming debt-free and then you should focus on taking your savings to the next level. While my preference for long-term savings will always be a share portfolio, those who find its risks too high, can always consider a savings account.

All salary increases and bonuses should be seen as opportunities to contribute more towards your pension fund, savings or paying off your debt.

50s: The time has finally come to decide on your retirement date, which should serve as a guideline for your savings strategy going forward, as this will determine exactly how much effort it will take to ultimately reach your retirement goals.

Asset allocation will be key in managing your retirement savings. Investing in shares may provide the best returns over a period of years, but at a higher risk when compared to other asset classes like money market or bonds.

The last thing any investor wants, is to “fall right before the last hurdle”. What I mean by this, is that investors who invested their capital mainly in shares before the great correction of 2008, had to watch as they lost a third of their capital before experiencing proper growth again from 2012 onwards. It would be a good idea to reassess your risk during this phase to prevent any possible unnecessary losses.

Retirement: You worked hard to reach retirement and although it may feel that your focus should mainly be on the income you withdraw from your savings, it remains important to ensure that your investments continue to grow (risk management), so that inflation doesn’t eat away your savings after the first decade or two.

Good products to consider would be both life annuities and living annuities. It is always advisable to consult an expert first, and make sure that you fully understand the benefits that each of these products offers in order to ensure that your hard-earned retirement savings remain safe and can go the distance throughout your golden years.