Harsh retirement realities

2012-08-08 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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  • palu.jon - 2012-08-08 16:11

    could you please explain how you get to the income figure of R844.74 p/m on capital of R82 742. it works out to a yield of around 12.25%.

      lacrimose.wolf - 2012-08-08 23:07

      Yes please advise on that yield. I've RAs going back to when I was 21 and STILL the magic modeller tells me I am a whopping R6.9 MILLION short of my retirement goal. How the [insertrudewordhere] am I to save/earn 6.9 mill in 15 years, short of joining the public service?

      wendy.webb.980 - 2012-08-09 08:20

      I think he is assuming that the capital will be wiped out after 13 years. That would happen with that capital and "pension" amount with a more modest return of about 7.7%.

      marcusvandermerwe - 2012-08-09 10:10

      Reality check. It is too late. I'd take a "gamble" and go high risk. The truth about high risk is that your investment is volatile, hwoever over long periods of time, eg 10 years you will 98% of the time get a higher return. At a modest and low risk 9% p.a. with no escalation, you will earn approx. R81 884 after 9 years. Let's say you go with Momentum high risk (27% p.a. over 10 years) and you increase your monthly payments by say 10%, your will have saved/earned R241 141 after 9 years. High risk is high risk over short periods of time, over 10 years or longer it beats low risk investments over 90% of the time. You are just in time for the last hurdle...

  • Trent Hodges - 2012-08-08 19:02

    What a load of hog wash- its never too late to start??? I hate to break it to you Mr Financial Advisor- but shes too late. You are 51 and don't have a cent saved for retirement? Unless you planning to retire at 110 you have no chance, and quadrupole what you want to save- hopefully those kids of your that you so heavily invested in their education, get a good job and you live off them(a parent and child's dream) unless they studying something useless like a Bachelors of fine arts, and then you are both screwed. And thirdly, you will pay fee's or commissions where ever you Invest- no one or institution offers "free investing" there will always be an underlying cost- don't use that excuse for your badly planned retirement.

      pmolesworth - 2012-08-12 06:40

      Trent, you need to look at the retirement date. Yes this client will find it difficult to retire at the perceived retirement age but a compromise on how long this person spends in retirement or partial retirement adjusts the whole calculation. It is all a matter of mindset and expectation. this is the factor that we should establish or create with advice first.

      karol.gembicki - 2012-08-21 11:33

      ouch ! aina! Thanks for being honest.

  • sycomachinery - 2012-08-08 20:45

    I've got a unit trust based retirement thing from Alan Gray in their equity fund, It's been doing very well, I got it when I stopped smoking, I just put my Cig money into it, the minimum amount is R500 , but I think there is a new law out, you can't have all your money in a equity fund. My advice is, speak to a good broker. BTW I stopped smoking 6 years ago and I've got seventy thousand rands in my Cig fund and that is at R500 per month. I'm Happy, but there are better funds out there.

      Trent Hodges - 2012-08-08 21:52

      Reg. 28 is the law with Equity investments for RA restrictions

  • lacrimose.wolf - 2012-08-08 23:04

    "He who understands it" is applicable to compound interest, not to the minefield of retirement planning options, rules & regs out there. I have to review my RA investments quarterly to check I'm still in the right funds. I'm not a financial person, but am expected to watch and understand the market. When things go south and one 'portfolio' loses 45% in a year, I'm presented with the 'buyer beware' cop-out. "Thank you for playing, sorry for your losses but these are our fees for this fiasco which have miraculously wiped out your investment. Here's a new option to dabble in. But it will cost you to switch". The burden has totally shifted to the policyholder who can barely comprehend current account bank charges, let alone retirement planning. So what defines a "good broker" to a policyholder? None of them call you when the market moves against you. They just greet you with the bad news and a set of forms for a new policy to invest in.

  • wendy.webb.980 - 2012-08-09 08:27

    Since we are told that she has remarried, she also needs to be very aware of what retirement provision her husband has. Will it be enough to support both of them, with her contributions being merely to have a bit of income of her own?

  • winifred.watson.9 - 2012-08-09 15:08

    It is very difficult to say how much one should need when you retire. It also depends on your lifestyle you have lived. My husband and I are just mediocre people, live in a middel class suburb, never had expensive cars etc we have never even had a holiday for the last 30 years. We saved and invested and originally when we first retired the first few years we were living nicely. Since then all food and essential services have increased and the most expensive of all has been our medical aid and electricity. Now we are approaching 70 yrs we cannot afford to invest in long term, With interest rates that have fallen through the floor we are battling to make ends meet. Medical now takes up half our income, electricy and essentials keep rising, you have to really have saved and invested a lot of money to live a stress free life, look at us, soon we will have to start dipping into our capital and that is not a good sign. So be warned, old age is not for sussies.

  • peter.bendheim - 2012-08-09 19:33

    "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." Could someone please explain what exactly this means?

  • george.k.townsend - 2012-08-09 20:39

    Truth of the matter is that the retirement industry have let us down badly. They arent Mutual companies anymore and their priorty is to the shareholders and not policy holders. Our funds were raped and wasted on foolish bids to gain a share of other markets. The only one that was successful was Old Mutual Scandanavia. Where is the money going? TO THE SHAREHOLDERS. Anybody who profits out of retirement funds is wicked. It like selling drugs

  • lynne.shone.31 - 2012-08-10 04:53

    I say this lady needs to cut costs agresively, not just cutting small costs. Start with the house, are there houses in cheaper areas she can say in? If she owns the house rent it and rent a cheaper one for herself. Get the car paid off and just keep it going don't buy another. At these low interest rates look at student loans for the kids education. First goal, clear all debt which is at high interest rates. Gaol two use a RAF linked to a unit trust with max equity, only mature this investment when you stop working which should be for as long as you are able. Goal three earn more, upgrade skills, get a better job, shart a moonlight business.

  • Brent Jones - 2012-08-10 09:23

    The problem with the questions and comments posted here is that the info is never filtered down to school kids so that they do not make the same mistakes. i was 23 when i started my retirement savings and that's only due to the fact that i started working in the financial industry. I should have been made aware of these things in school or by my parents... but maybe im just funny that way.

  • mike.immelman.7 - 2012-08-10 09:39

    Those saving for retirement should not expect to get out what they haven't put in. If she puts in 500 a month for 9 years she must expect to live on the equivalent of 500 (with inflation added) a month and that will only last 9 years. She had better die before 69. The only thing that would improve on this is if her investments earn more than inflation and over the last 5 years neither the stock market nor interest rates have done a lot better after tax. She needs to save half her income if she intends to live on half after retirement.

  • cobus.benade.5 - 2012-08-10 15:36

    Perhaps you should consider property. Let me explain. Buy a small property in the region of R450 000 to R500 000. Buying off-plan or a "quicksell" property will save you paying costs. Now rent the property out and try to cover ALL your costs (bond, levies etc.) with the rental income. IF there is a shortfall you can cover that with your R500. You are now sitting with an asset worth R500 000 and somebody else is paying it off for you! Let's assume your rental income starts of at R5000p/m with a rental escalation of 10% p.a. In 10 years you should be getting approx. R12000 p/m. AND the sooner you settle your bond ,with ANY extra income you receive AND YOUR R500, the better off you will be. Once your bond is settled you can enjoy a monthly income in the region of R15000 p/m AND you have an asset worth (then) R900 000 to R1,1m which you can sell should you need cash. Note of warning - it is not as easy as it sounds though. You will have to put in some effort and legwork. DON`T be lazy - do your homework and MANAGE it yourself.

      wendy.webb.980 - 2012-08-10 16:00

      Cobus - you always pay costs in respect of some sort of tax. The only difference with off-plan is that your 14% VAT is included in the price, ie in your R450K to R500K range, the VAT is, in round figures, R55K to R61K. Buying an existing property in that range there is no transfer duty, only conveyancing fees and bond registration which you have to pay anyway. The other question you need to answer is where do you get a property in that price range yielding R5000pm. And then you still need to deduct rates, maybe sectional title levies, etc.

      cobus.benade.5 - 2012-08-11 10:08

      Wendy - I am well aware of the costs -there are always costs. When I say "save" I am saying she does not have to put down huge deposits, which sounds like she does not have anyway. With property you use the BANK`s money to acquire an asset and let your TENANT pay for it. Yes, she may have to contribute towards it which her R500 p/m is for. As for your second question; have you seen what you can get for R500000 lately? I have added another a 2 bed, 1 bath recently for R390k, in a stunning area to my portfolio. My bond - R3600. Levies - R780. Rental - R4400(excl. services). Come Jan 2013 I will hike my rental with only 5% to R4620. "Student properties" bring in huge profits as well. Bought my first one, 3 years ago, for R920k and I have been receiving a nice income from day ONE. There are PLENTY of good buys out there in the current market. Just SHOP SMART! But now WENDY, what would YOU suggest this lady does with her R500 a month?

      pmolesworth - 2012-08-12 06:49

      And when the interest rate tops 20% again? where do you find the additional income to fund the mortgage?

      cobus.benade.5 - 2012-08-13 11:46

      @pmolesworth - Sure, but all investments come with some degree of risk. And this is where you need to MANAGE it and to get CREATIVE. Fix the rate then, if need be. Push up the rent, if you must. But settle it as soon as possible. And also taxes - you will be amazed at what and how much you can actually claim back. And then pay those rebates straight into the bond as well. I have seen many people fail miserably with property as well though - They were just too lazy to put the hours in. But how would you spend R500?

  • keedavis - 2012-08-21 06:51

    @cobus.benade.5 What sort of things can be claimed back from tax on a second property? I currently live in a modest house - cost approximately R385k in 2008 - fortunately due to further development a similar house now costs around R450k. The wife and I want to buy a bigger property and rent the current property. The rental will/should cover the bond, rates, water and levy. What am I entitled to claim back from the tax man?

      roelf.strydom - 2012-09-23 20:07

      The best thing to do is see an Accountant, but you should be able to claim, interest on the bond, rates and taxes, any maintenance to the property, levies if any, garden services etc. In short any expenses required to earn a rental income excluding any capital expenses.

  • roelf.strydom - 2012-09-23 20:04

    My wife and I found a better way to provide for our retirement. We joined a network marketing company, one that is 10 years old and has a great track record. It cost us R245 to join and our monthly purchases form the company is R2100. (we buy the maximum)Our monthly income after 12 months exceeds R30 000pm. Our monthly income increase on average by 18% - 25% per month. Not only do we have a growing income, the products increased our health and is saving us money on doctor and medicine bills! Show me any other investment that can do that and I will gladly investigate it. It is not a get rich quick scheme, it is very simple, not always easy but worth it. We are so impressed by the results that we now help people full time to get the same results.

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