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Half of economically active South Africans aren’t saving for retirement, and nearly 4 in 5 of those who are saving worry that they won’t have enough money to maintain their lifestyle in retirement, according to the 10X Retirement Reality Report 2021 (RRR21). 

But this situation can be avoided. Andre Tuck, Senior Investment Consultant at 10X Investments, outlines four common financial mistakes for retirees to watch out for.

Underestimating your expenses  

Your financial situation is likely to change during retirement, and it is key to keep your budget up to date so that you can respond confidently to sudden expenses and opportunities that come with costs. A vague plan based on the assumption that you’ll be spending less money in retirement will probably end in disaster. 

The RRR21, which is based on findings of the 2021 Brand Atlas Survey, which tracks the lifestyles of the universe of 15 million economically active South Africans (those living in households with a monthly income of more than R8,000), found that just 7% of savers have full confidence in their plan. This confirms that having a plan is not enough: your plan needs to be workable, realistic and up-to-date. The same goes for your budget: a guesstimate won’t help much. 

While expenses, such as travelling for work or bond repayments, will likely fade away when you retire, your spending will probably increase in other areas, such as medical expenses. Healthcare is an important area to consider when planning your retirement budget. According to Statistics SA, most causes of death in South Africa are attributed to non-communicable diseases, such as stroke or heart disease, manifesting in late ages. If you don’t provide sufficiently for healthcare, your retirement could become a costly and stressful exercise in paying off medical bills. 

Another factor to consider is that, as a retiree, you might find yourself looking for ways to fill your time. The cost of hobbies – such as travel, eating out, sports and other entertainment – can really add up. Create a detailed and realistic budget to help you to manage your money, instead of allowing it to control you.

Drawing down too much 

The RRR21 found that 79% of those who do have a retirement savings plan (up from 75% last year, and 72% the year before) are unsure they will have enough money to maintain their lifestyle in retirement. 

Retirees who have selected a living annuity, rather than a life annuity, get to have some control over their money in retirement as well as to leave an inheritance. That flexibility comes with the responsibility to calculate a sustainable drawdown to ensure they avoid outliving their savings. 

When calculating how much money you can draw each year you need to consider your time horizon, your asset mix and the fees you pay. The conventional approach is to set your desired income upfront by using the “4%-rule”. This rule, based on statistical analysis, refers to a constant, non-volatile spending plan, which provides that investors can safely spend 4% of their initial capital, growing annually with inflation, for 30 years, independent of stock, bond and inflation gyrations, assuming a 60%-40% mix of stocks and bonds. This model would not hold up for a more conservative asset mix. 

There are other ways to apportion your savings. It is important to do your research and consult with your fund provider or financial advisor about choosing the approach that is best for you. Financial planning tools, such as the 10X Retirement Calculator, can help you find your optimal sustainable draw-down rate, based on your estimated life expectancy and other parameters.

Paying high fees 

While most retirees know that their drawdown rate is an important lever to ensure their savings last, few retirees realise that the fees on their living annuity are likely to be their single biggest expense in retirement. The RRR21 found that 56% of retirement savers don’t know what they are losing to costs or say there are no fees at all. (Of course there are.) 

To illustrate the cost of high fees, assuming a drawdown of 5% from a R4,8 million pension pot, a retiree would receive a pre-tax annual income of R240,000, or R20,000 per month. At the industry’s average fee of almost 3% p.a. (typically made up of advice, administration, investment management fees) they would be paying costs of around R144,000 p.a. (R12,000 per month), meaning they are paying themselves only two-thirds more than the service providers. Or, from another perspective, almost 40% of the drawdown goes on fees. 

Retirees can check with various investment companies, including 10X Investments, what their fee structure is.

Panic selling when the market is down

Investing in growth assets has proven to be the best way to increase your wealth. Inevitable periods of market volatility may, however, test your nerves. You might feel the urge to panic and change your asset mix when you see a sudden sharp drop in the value of your portfolio. Giving in to your emotions and switching when the market is down will merely lock in your losses and leave you with the prospect of a permanently lower income thereafter. 

Based on global life expectancy figures (as reported by the World Health Organisation in 2020), individuals who retire at 60 are likely to live another 15 years or more, which means they have time on their hands to ride out bouts of market weakness and recover any losses. The trick is to keep your eyes fixed on your long-term horizon and not react to short-term market events.

It is important that retirees manage their retirement savings in a way that is sustainable so that they do not face running out of money before time, or spend precious years worrying that they will.


Click here to download the full 2021 Retirement Reality Report


Article, courtesy of 10X Investments

The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice.  

10X Investments is an authorised FSP (number 28250)


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