Longevity isn’t for sissies
Every year we get a greater understanding of what shortens or prolongs life. Medical research finds ways of extending life and life expectancy increases – to universal celebration. This increase in life expectancy has to be funded in the retirement years. In countries that have decent government sponsored pensions this is causing a severe problem, exacerbated by the slowing birth rate. In effect in those countries they are using pension contributions from the young to pay the old, because estimates made decades ago as to how long people would live were way out. This is all going to implode one day.
In South Africa, where most working South Africans will have to make their own provisions for retirement, and cannot rely on the government safety net, this problem is right on our doorstep. The retirement models that many financial planners use, still assume that we will live maximum 20 years past retirement age of 65. In other words 85. These models assume total capital consumption because preserving capital makes the required savings ratios out of reach for most struggling families.
Unfortunately it is much more realistic to assume that you will live 30 years past retirement. There is another growing trend that is going to impact this even more. Families are postponing having children into their thirties, and even their forties. This means they will have dependants will into the traditional ‘accumulation’ years, perhaps right to the edge of retirement. It’s an uncomfortable fact that children put a significant dent in your consumption and makes it very difficult to top up retirement savings. If couples that delay starting family are doing that high accumulation and retirement saving before children, then there wouldn’t be an issue, unfortunately most couples are consuming much of that income on travel, leisure and lifestyle assets. It is going to take 20 years for that problem to become really apparent, but if you fall into that demographic I recommend you sit down with your financial advisor and plan out a happier outcome. The good news is that the proportion of your income you need to put away is going to be fraction of what it would be in your fifties.
Wealth is what is left after you have consumed your income. So it is simple, if you want to increase your wealth, increase your income or decrease your consumption.
Passive income: having your own property portfolio used to be the great panacea of having a passive income at retirement, and in many ways it still is, but it isn’t really passive at all. The property has to maintained, tenants managed, utilities paid, insurance paid and defaulting tenants evicted ( with legal fees). Still, it can be a great retirement pot. Ordinary investments, properly invested, are actually far more passive and less stress. When the markets are incredibly volatile that might sound like nonsense, but try evicting a tenant who hasn’t paid for rent or utilities in 6 months.
Consumption: Frugal is the new cool. Gone are the flashy conspicuous consumption habits of the nineties and noughties. Post 2009 has seen a new normal. The global economy is never going to be the same again. Part of the evolution has seen a far greater focus on fees associated with investments and this has the power to really disrupt the investment field. Excessive commissions for anything – selling houses, car or investments are a thing of the past. Beware of the consumption feasts that can very quickly put a hole in your wealth accumulation – specifically moving house and changing cars.
Action: As uncomfortable as it might be, the sooner you get a handle on what you want your retirement to look like and what you need to do to achieve it, the better. You need to run through various scenarios and come up with one that suits your objectives then, and your pocket now.
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Author Dawn Ridler ©