Where there is a will, there is a way

By Deidré Valentine

Plan for your retirement like you would for an expensive holiday

Where there is a will, there is a way. However, when the will is not co-ordinated with the way, it will lead to an outcome much different than planned.

Retirement planning is very much similar to planning for a holiday.

Very few people can afford to go on an expensive holiday every year and most first have to save up for this luxury and even more people simply cannot afford a holiday break.

Similarly, many people unfortunately cannot retire comfortably, and their fate is to continue working until days end.

National Treasury calculates that only about 6% of all South Africans are on track with saving for retirement, a worrying number.

Where do you stand with your planning?

How do you really know if your retirement journey is on track?

If I were to ask investors whether they can retire or with how much they will be able to retire, I’d be inclined to say that very few would be able to provide an accurate answer.

Investing diligently every month for retirement purposes is laudable but doing so blindly and without context will lead to an ill-fated retirement situation.

It is here where the way is as important as the will to save for retirement.

Returning to the concept around planning for a holiday. To know how much you need to save, you need to gauge the following:

  • When do you want to go on holiday and how much time do you have to save up for it?
  • Where do you want to go and what will be the travel costs involved?
  • For how long do you want to go on holiday for?
  • If not travelling locally, what is the currency conversion rate of that country and how will that affect the total cost of your holiday?
  • If you arrive at your destination, where will you stay and what attractions will you visit?

All the above will determine the total cost of your trip and how much you need to start saving in order to make your budget work.

The same logic applies when planning for retirement:

  • When do you want to retire and how much time do you have until such date?
  • For how long after retirement does your capital need to last?
  • How will currency movements, assets, and market growth impact your retirement calculations?
  • What will your monthly expenses be like in retirement and what activities, or ad hoc costs (like buying a new vehicle) would you want to budget for?

The will and the way

When considering all these factors, it results in some complicated permutations. You need to make certain assumptions and need to budget for unforeseen circumstances.

It is here that input of an expert can add significant value to the retirement planning process. Small changes in growth assumptions or the construction of your underlying portfolio to achieve this growth target, can have a material impact on your eventual retirement funds.

What are your retirement goals (the will)?

The first question to ask, or what your adviser must ask you, is the amount with which you wish to retire.

You can start by taking your existing expenses as a guideline, because certain expenses (like travel expenses) might decrease after retirement, while other expenses (typically medical costs) will increase.

Are you going to reach your retirement end destination (the way)?

Next you assess your existing investments, how it is constructed and if that capital is going to match your retirement goals.

Assume a 25-year-old investor starts to invest R5 000 p.m. for retirement (that increases by 5% every year) and plan to work until age 65.

When making a long-term growth assumption of 10% return on investment, it equates to a future investment value (in today’s terms) of R6.92m (scenario 2 in the table).

Scenario 1: Your portfolio achieves a return of 7% instead of 10% as planned. The reason for this could be that your portfolio was invested too conservatively and did not include enough exposure to growth assets or that your specific investment product was loaded with unnecessarily high fees.

The difference of 3 percent return per year results in a future value of about R3.58m (in today’s terms), which is significantly less.

Scenario 3: Your retirement end date usually feels far into the future and a retirement plan typically ends up at the bottom of your priority list, while shorter term needs are tended to.

Assume an investor invests for 30 years only. His portfolio value will amount to R3.88m only (in today’s terms) at retirement. The impact of compounding growth is immense as can be seen by these calculations and the key is to start as early as possible.

If you are not an experienced tourist or if it is the first time that you want to embark on an expensive holiday, it would be worth your time to approach a travel agent to help you navigate through this landscape to ensure a successful trip.

As with retirement, it is important to talk to an adviser about your retirement goals, how you are going to achieve them and for the adviser to continually assist you to ensure you stay on course for retirement.

Deidré Valentine is a financial planner of ProVérte Wealth and Risk Management. Contact her at info@woodlandwealth.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.


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