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Harsh retirement realities

Aug 08 2012 15:00
 Fin24 reader writes:

I would like to enquire about my best option to start saving some money for retirement.

I know it's late, but it's due to various circumstances and divorce that this only becomes an issue now. I have remarried but I also want some retirement anniuties or unit trusts of my own. 

I'm still working and earn about R7 500 net per month. I have no insurance policies, only a Greenlight critical illness policy.

At this stage I'm still contributing quite a bit towards my children's education and thus do not have a lot to spare at the end of the month, R500 at the most.

What would your advice be for the best option and best growth? I will have to work for at least another nine years. I'm now 51 years old.

I also don't want to pay broker commission fees as I would rather go direct.  

David te Brake, financial planner for Pioneer Financial Planning, responds:

It's never too late to start saving for retirement.

Sure, it's best to start as young as possible, but sometimes, despite our best intentions, life gets in the way and we need to improvise.

However, time waits for no man (or woman) and it's not on your side. Let me explain why.

You mentioned the R500 a month you have to put away. This next part might be best read sitting down.

Numbers don't lie, so let's take a look at some. The harsh reality is that an investment of R500 per month will not get you very far in retirement. The value or purchasing power of R500 nine years from now is R844.74. 

Basically, after nine years your investment value will be R82 742 (on an assumed 9% return), which would effectively provide you with a inflation-adjusted income of R844.74 per month for 13 years.

And we both know that's not gonna cut it.

Unfortunately, you have found yourself rounding the last corner of the race, and you're near the back of the field.

But the race is not over. What we need is to get aggressive.

By aggressive, I'm not talking about the risk of your portfolio. Let's face it - you're in no position to be reckless.

But you can be more aggressive about the amount of money you put away on a monthly basis. It's about priorities now.

While your children's education is a priority, there might be some non-essential luxuries that you can afford to let go of.

Maybe it's that gym membership you never use, or a cellphone contract costing you more than you actually need. Take a look at your lifestyle and aggressively reassess. Every penny saved now is a little more breathing room in retirement.

So, we've established you will need to save more each month by whatever means necessary. The next harsh reality is your retirement age. You may need to work for more than nine years to secure a safe and comfortable retirement.

You aren't alone in this regard. There is global trend towards people working longer, aiming to retire closer to 70 than 60.

It's a result of a tougher global economic climate. Even the French have increased their official retirement age - which is saying something.

Now, I'd like to address your desire to go direct. Perhaps you have had a bad experience with a financial adviser in your past.

This happens I'm afraid, but I'd urge you not to give up on our humble profession. You are 100% correct in not wanting to pay broker commission, but only if all that broker is doing is selling you a product.

Financial advisers, as opposed to the old notion of "brokers", are supposed to assist in determining the correct levels of risk in your portfolio, to help you calculate of the amounts you'll need at retirement and how much you should be saving.

This can be done in the form of fee-based financial planning or as a commission built into the premium. People are motivated by incentives. A good financial adviser wins only if you win. These are the guys you want advising you.

A word of warning: stay away from "brokers" who offer investment products from insurance companies. Make use of asset managers for your investments as the fees should be much lower, and the advice you pay for will generally be of a much higher standard.

I leave you with the words of Albert Einstein: "Compound interest is the eighth wonder of the world.

"He who understands it, earns it... he who doesn't, pays it."

 - Fin24

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