By Nirdev Desai
HOLISTIC financial planning implies a balancing act of prioritising one’s financial goals.
The assets saved for retirement are the largest pool of assets most individuals will accumulate in their lives. At the age of 65, the average life expectancy for the largest 20 economies (G20) is around 85 and, in a single-income household with a spousal dependant, there is a healthy chance of at least one person living to 95.
Understand your financial planning priorities
Planning for 30 years of retirement income necessitates ensuring that other priorities don’t detract from meeting savings and investment objectives (during the accumulation phase), or impact retirement investing and income drawdown management (for at least 30 years in the decumulation phase).
Further, while living annuities are ideal for those with sufficient capital, and advantageous from an estate planning perspective (living annuities do not form part of your estate on death, thus mitigating estate tax duty and reducing the size of the dutiable estate); a retiree is self-funding and needs to manage longevity, drawdown, and growth versus conservative asset risk to ensure that there are sufficient assets – at least until the death of the last surviving spouse.
With so many variables, it is prudent to ensure your living annuity will provide an income for at least 30 years.
Understand how inflation will affect your lifestyle
If we lived in the future with the same basket of goods as we have today, inflation would be a good proxy of what your target amount needed for retirement should be. However, retracing a few years, say 30 years, we can see how much things have changed.
Cellphone and fibre internet costs were not even a thought, self-funding one’s electricity requirements (“going off the grid”) was not a consideration for most, and medical expenses and school fees were vastly different (the latter not just a South African phenomenon).
The official inflation print should therefore only be a starting point for understanding your existing and future lifestyle inflation. If you lived in the same world as 30 years ago, saving at cash rates may have been adequate, but in an ever-changing world, your inflation basket will likely be more than the inflation basket set by government.
Some further food for thought that can assist in understanding lifestyle drivers of inflation is a concept called Baumol’s Cost Disease, which explains that, on aggregate, service prices go up by more than goods prices over time. For example, it takes the same amount of time for a musician to perform a symphony today as it did 30 years ago, but the time taken to produce a pencil has come down substantially due to higher production efficiencies.
If your basket of goods consumed (and planned for) consists of more services than goods (which is typical in the middle to higher income and wealth groups), there is a good chance that you will need to cater for higher inflationary requirements.
Manage your emotions around the short-term volatility of growth assets
Make sure you have a good coach to help manage your emotions through periods of market volatility. Our biases need to be kept in check if we are to achieve the inflation-beating returns our post-retirement lifestyles require.
The higher the required return above official inflation numbers, the higher the volatility of the required portfolios is likely to be. A good financial planner will be able to help you understand the time horizon required to achieve your expected returns – and factor periods of heightened market volatility into the equation, as these short-term fluctuations are typically accounted for in a good financial plan.
Have a game plan to manage events that will throw off achieving your goals:
1. Your broader financial plan needs to account for unexpected events that may impact your retirement savings plan and the legacy you wish to leave. Examples include catering for family needs, employment events (such as relevance in the workplace, retrenchment and disablement) and medical expenses (including palliative care in the final year of life, which accounts for approximately 25 – 30% of medical aid schemes’ annual expenses).
2. Understand that you may have “lifestyle creep” through your working career – what you consider to be a good lifestyle may change as time passes, so you need to be financially prepared to adjust your pre-retirement contributions to meet your lifestyle requirements in retirement. Naturally, since a shorter time frame is available to save for this increased capital requirement, substantially higher contributions may be required than if you had started on your savings journey early on in your career.
There are many other aspects that a good financial planner will help you with in planning for a great retirement, such as a cash flow analysis, the required growth assets to achieve sustainable drawdowns through your lifetime, and the legacy you wish to leave. Please engage with one early on, and continually through your pre-retirement savings journey, so you are well prepared and have sufficient provision for your retirement lifestyle.
Nirdev Desai is Head of Sales at PSG Wealth.
PERSONAL FINANCE