Episode 006 - A Balanced Retirement

Its hard to keep track on whether you are saving enough for retirement and since retirement will happen in the future, there are so many variables to consider like your income, inflation, expenses, how far you are from retirement, how much you have saved already, etc. I had some very interesting comments and questions during a conversation I had with my wife. She asked if I was given the opportunity to retire early, would I do it? If yes, what would determine my yes. And then also on my birthday, my young nephews called me and wished me many more years and said they would like me to go up to 100 years!

So with that in mind, let's try tackle this tricky situation. For any problem you would like to solve, you need variables and certain assumptions in order to get to your answer. Also remember that this post is written by a 34 year old, so my assumptions will be along the lines of “half-way through to retirement”.

Question: How much do I think I would be happy with, at Retirement?

To answer this, the internet comes to the rescue. There are online calculators that you can use, I will share links at the end of this blog entry. Also, be aware of time-value of money, R1Mill now will not be the same in the year 2050 – so once you are done with the calculations, if it says you will need R50Mill at retirement, then that is the amount in the future, you can calculate it back to now so you can sort of see what the amount in today’s money.

A couple of assumptions:

• My current salary will at least keep up with inflation, so that I am able to keep up with my life-style & expenses.

• Also what is important about the above point is the concept of living beyond your means. If you are a person who gets paid R100 but lives a R130 life-style then you need to look into your budget and life-style first and see if you can rectify things before it gets even more messy. It can be done!

• An obvious assumption to add is that I will retire at 65 and also I don’t lose my income along the way (job loss, etc).

• My nephews said they want me to live till 100 years, so that gives me 35 years of maintaining my life after I retire. In all honesty, I am happy with 20 years after retirement – but don’t tell them!

• By the time I retire, I will have less monthly expenses. Our children would be done with school, properties paid up, cars paid up etc.

• So essentially I would be happy to get around 50%-60% of my last salary every month as income from my retirement funds for those 20 years.

• I am also assuming that I won’t be buying myself a red Ferrari when I hit retirement – that would take quite a lot out of my retirement value.

The recommendation is always that you put in 9% to around 15% of your salary towards your pension/provident, if you can. But where do you save that money in order for you to keep up with inflation. South African inflation averages quite high. If you pull data since the 70’s, we average around 8% or so, which to me is quite high. But if you look at it since the 90’s we do keep to the SARB inflation target (3%-6%) at around 5%. So whatever I am investing my pension money in, in needs to keep up with 5% inflation first, i.e on average I should get an annual return of 5% or more from the products I have invested my pension money in.

I never try to be clever with my allocation for my pension fund, and also there is Regulation 28 which sometimes prevents me from trying to be clever in what assets I want to hold. I have always believed that if you put money in your retirement and you get into a fund that gives you inflation+2% you will be good! That is my target annual investment rate at the moment, approximately 7% or over per annum. But if inflation goes up, my target will probably move (need higher returns) and if it drops then I will keep my target as is.

So instead of moving in and out of Unit Trusts, ETFs I have actually opted to invest in a High equity Balanced fund, with very low management fees. Fees are also very important when you do your allocation. Anything north of 0.50% fee charge on your retirement annuity you should immediately think of dropping it, because the fees also eat away your savings. An annual fee of 1% in retirement will probably take away 20% of your retirement value without you even knowing as this accumulative through the years.

There are 2 things I look at when I check my current retirement allocations and the performance; its the 1 year number and the last 3 years. The 3 years tell me the long term story and determine if the fund is reaching my target annual returns. The 1 year number tells me if the fund is doing well in the long term numbers just because of how great it has done in the last 12 months or not.

Lastly, saving for your retirement does not necessarily have to be through saving in Unit trusts etc. There are people out there who actually like physical assets more than fund investments. They buy things like property, art, vintage items which appreciate in value over time. So if that is something that you want to incorporate as well, then go ahead.

Calculate your retirement value here: tool

I hope that helps!