How to plan for retirement at any stage of life
05 April 2016
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Hello and welcome to another edition of Old Mutual Live Business, my name is Chris Gibbons. So, you’re thinking of retiring or you know that retirement will, hopefully, happen at some point in your future and you need to start planning for it? What has to happen? What are the steps you need to take and how does that process change with your timeframe? In other words, planning for retirement five years from now is very different, I would think, from planning for retirement in 40 years.
Old Mutual Live Business, I’m joined now by Gregg Sneddon, Financial Consultant whose company is called The Financial Coach, he’s on the line to us from Cape Town. Gregg, welcome once again to Old Mutual Live Business, thank you for joining us.
Let’s take this in easy steps. Imagine I have just started out – I wish – on the road towards retirement. I’m 25 – I wish again – maybe I just qualified as a professional, something like that. I know I should be planning for my retirement, but don’t really know what to do. What do you recommend?
Planning for retirement at 25
Gregg Sneddon: Morning Chris. Yes, first of all I think there’s three things that will impact your retirement pot one day and those three things apply to everybody. The first is time, the amount of time you’ve got to save. The second is the amount you can put away and the third is obviously return.
As a 25-year-old, the world is your oyster, you’ve got time, you might not have the amount, but you can afford to go for higher returns or higher volatility. My advice to anyone is, don’t stick your head in the sand. You kind of have to take ownership of the situation and start putting away money for your retirement.
If you are formally employed then you either will be part of your company pension fund, you want to maximise those contributions. If you’re not formally employed, then you’ve got to start your own retirement funding by putting money into an RA or some unit trusts or exchange rated funds or something like that. The bottom line is, the more you can put away for the longer period of time with the greatest returns, the better you will be at retirement.
CG: There’s many a person listening, I’m sure, perhaps 10 or 12 years into their career who has actually done nothing about retirement planning. Maybe they’re now married, they’re starting a family and they wake up to the fact that they need to think about retirement at some point. Are their needs aged 30-35 significantly different from the needs of a 20-25-year-old?
How planning changes starting in your 30ies
GS: I don’t think their needs are different but I think the financial pressures are certainly probably significantly different. Suddenly you find yourself with a bond, you’ve got kids, the money doesn’t seem to go as far as it used to. This is the point in life where people need to start making some tough choices.
The longer you defer your retirement saving, the more you’re going to have to put away one day because of compounding. You’ve got to start doing something about it and it’s not going to magically happen. You’ve actually got to get intentional. I like that word because it implies that you actually, there’s some intent.
You’ve got to sit down and say: right, we’ve got to start putting money away towards retirement, which means you’ve got to make some tough choices. Maybe one of those tough choices is that you decide you’re not going to keep up with the Jones’s.
You’re not going to send your kids to the fancy school, you’re not going to live in the upmarket neighbourhood, you’re not going to drive the fanciest cars and keep chasing them. Because it’s incredible how many people I come across who are doing that and have got nothing saved at all.
CG: All right, now it’s a bit more serious, I’m 45. Maybe the kids are at school, could be that some have left home even. I have some kind of retirement scheme at work, but I don’t think it’s going to be enough when the big day finally arrives, what do I do?
Adding to your retirement in your 40ies
GS: Thinking and hoping is not a retirement planning strategy. It’s time to do a stocktake and find out, A, what is the value of your retirement fund. What are you putting in and what are the projected returns of this fund going to be and be realistic. We always prefer to be a little bit more conservative on the return projections. I think realistically you’re probably looking at inflation plus 5% over the long term for retirement fund returns, so do a stocktake.
What is the value you’ve got now and then start planning and projecting forward. What sort of capital will I have at retirement in 20-25 years’ time and what income can that realistically generate for the rest of my life? Start getting the facts, getting the figures and then planning from there.
CG: All right, let’s go forward 10 more years, retirement is looming because I’m now 55. Retirement should be within sniffing distance by now, so two scenarios aged 55. The kids are out of the house, they’re off my hands. I’m certainly not stopping work, I have a reasonable plan through my employer. But I would like to add to that so that my wife and I are comfortable in our old age, what are my options?
What to start thinking about in your 50ies
GS: You’ve got two options. If you’ve got opportunity from a tax point of view to increase your contributions into your pension fund or your own retirement annuity, then that certainly would make a lot of sense. Because the tax saving is very often very significant. If you don’t have non-retirement funding income where you can increase your contributions then you’ve got to look at saving elsewhere. I think unit trusts, ETF’s, things like that.
But Chris, I think now is also the time when you’ve actually got to start thinking about what happens the very next day after you’ve retired. You’ve got 10 years to go, 65 is the mythical date that you’re going to stop working. What are you going to do the next day, for the rest of your life? It’s time now to start thinking about hobbies and interests that you can occupy yourself with once you’ve retired.
So often people get to 65 or retirement age and particularly with men, they no longer have a purpose anymore, they no longer have a reason to get out of bed. Depression sets in, marriage takes strain and people fall apart. You’ve got 10 years, start looking for things that you’re going to do one day when you stop working.
CG: All right, final scenario, oh, there’s another one aged 55 and this is the much less attractive one. I am 55 and actually I have nothing saved up towards retirement at all. Perhaps a business went bust or perhaps I just haven’t been able to save or whatever, what do I need to do now?
GS: Make sure you love what you’re doing because you’re going to be doing it for the rest of your life. Maybe we joke and we laugh about it, but that’s actually quite true. Retirement as a concept is an artificially introduced concept. When it was introduced to the workplace people were never supposed to be inactive for 20-30 years. You were supposed to retire and then kind of check out within a year or two.
Now people are living 20-30-40 years beyond retirement, so it’s almost impossible to fund 40 years of inactivity from 30 years’ worth of contributions or whatever it is. Think about what it is you’re doing and how long can you continue to do this for. Because the reality is, you’re going to be doing it for a lot longer.
CG: Finally, in my mid 60’s, I’ve decided this work business is for the birds. I’ve done my 40 years, I want to park off. What do I actually need to do before making that decision and jumping off the bus?
That’s a wrap – how to finally call it quits
GS: Okay, so one of the things we’ve spoken about already is what are you going to do with the rest of your life. That’s a very important thing. People just think about retirement as being a financial event, it’s not a financial event, it’s a massive life event.
What are you going to do with the rest of your life, that’s question number one, I think. The finances are a separate discussion. Now is when you’ve got to say, well, how much have I got in the pot? What’s the reasonable income that it can generate if I go for this annuity? A life annuity through an insurance company or if I go through a living annuity which is done through an investment company.
Have I got financial dependence and all that kind of stuff. You start re-looking, is your will current, is your estate planning in order? All those kinds of things need to be addressed. I guess it’s time to do a bit of stocktaking and a bit of homework.
CG: I suppose part of the problem someone in your position would face, as a financial planner is that everyone is different. There might be a little wrinkle here or a different shade over there and these are things that could materially affect how you approach retirement.
GS: Absolutely and so it’s very important that financial planning is an ongoing thing, it’s a process, it’s not a once-off event. You need to be, I suppose like visiting a doctor, having a regular check-up. It doesn’t mean you have to go every year, but certainly every 18 months to 24 months. Check in, what’s the status of your funds, where are you.
You can’t just kind of live in ignorance and expect that everything is going to be okay one day. Then you wake up and it’s too late. You need to take ownership of this thing right from the very start. 25-years-old, you get your very first job, that’s the time to start doing it. You’ve got to be grown up about it. You’ve got to take responsibility because nobody else is going to.
Do I have to retire?
CG: Let’s go back to the other end of the scale, one of the questions that I think we need to really ask is, do I need to retire? I enjoy my job, I enjoy my work. How do I keep on at that for as long as possible?
GS: Chris, that’s such a difficult question because certainly for somebody who is self-employed or working in the informal sector, that’s definitely an option. But if you’re working for a big corporate, they force retirement at 65 or 63 and then you’re kind of out. If you work for the government, if you’re a teacher and you love what you’re doing, well, come 65, you’re out of there.
So you need to start thinking about which sector you’re employed in and what is it you can do afterwards. I meet many people, headmasters, teachers who go back and consult, who go back and mentor, things like that. Cause there are many programmes. But then again I meet others who say, I’m tired, I’ve had enough.
If that’s the case, then fair enough, but then you need to make sure that you’ve got enough money to be inactive or to do something else. People get involved in charities, there are all sorts of things, but certainly the nature of retirement is changing.
I think more and more people are realising that the days of relying on this massive retirement pot are limited and are certainly thinking more and more about working longer. Finding something they love doing and doing it for longer.
I met an 87-year-old doctor recently who is still practicing as a doctor. He used to be a surgeon and now he’s just consulting as a GP and doing it at one of the government hospitals because he loves doing it. His son is desperate for him to stop working and he said why, what do I do with the rest of my day? I love what I’m doing and I’m able to do it. So certainly, that 87-year-old is still practicing as a doctor – fantastic!
CG: As you say, fantastic. Gregg Sneddon, Financial Consultant from The Financial Coach, thank you for joining me on Old Mutual Live Business.