By Sanlam Investments, 10th December 2015
Janet and Talisa, two school teachers and lifelong friends, both retired in the past year. They earned similar salaries and have been working since their early twenties. But while Talisa’s monthly retirement income comfortably exceeds R25 000, Janet is battling to make ends meet with her R18 000 (before tax). What is Talisa’s secret?
The 2015 Sanlam Benchmark Survey, specifically the results of the questions posed to pensioners, may provide some insight into what exactly it is affluent retirees (earning more than R25 000 p.m.) do differently from the core group (earning up to R25 000 p.m.) The table below captures a few of the most important differences.
Source: Sanlam Investments | June 2015
For starters, affluent pensioners rely more heavily on financial advisers for their retirement planning. More than 84% consult a financial adviser before retirement. More often than not this is their own personal adviser who will look at their unique income requirements and risk profile, and recommend a solution tailor-made for that individual. The solution includes how much they need to save, for how long and into which product/s,
In contrast, pensioners earning less than R25 000 in retirement do not make use of a personal financial adviser as widely as the affluent group. They also tend to rely on the company’s HR officer for financial advice.
What else does the Benchmark Survey teach us?
Starting early can give savers a dramatic advantage. A simple compound interest calculation shows that someone saving R1 000 a month from age 21 to age 29 and then add nothing to the kitty after that, will have more than R3.2m at age 60! A late starter who starts saving R1 000 at age 29 but continues saving until age 60, will accumulate only slightly more than R2.5m despite the long investment term.
The Benchmark Survey shows us that the average age at which affluent retirees started saving is around 23.6, more than three years earlier than the core group – an important difference! However, it’s never too late to start saving and a financial adviser can calculate how much more – or how much longer – someone needs to save when she is playing catch-up.
One in four core group retirees took a lump sum withdrawal at the point of resignation or retrenchment, while only one in five affluent retirees dipped into their retirement savings before their actual retirement date.
But depleting their savings in this way was not the only damage done. A whopping 63% of the core group who withdrew money was not even aware how much tax they would need to pay on this pre-retirement withdrawal (much more punitive than lump sum withdrawals at retirement.) A financial planner’s knowledge of the Pension Funds Act and tax legislation is therefore pivotal at the point of resignation or retrenchment.
A financial adviser will usually encourage a pensioner who chooses a lump sum at retirement to stay within the tax-free limit. Putting the lump sum to good use is important, though. The interest payable on short-term debt is high and can be quite a burden on the pensioner’s monthly budget. Where possible, all short-term debt should therefore be settled at retirement.
The Benchmark Survey shows that, among affluent retirees, the use of the lump sum to reduce short-term debt increased from 16% in 2014 to 46% in 2015. Even though the results seem staggering, relieving the debt burden needs to be a priority for all investors, not only retirees.
Once a retiree has converted all her retirement savings to a guaranteed life annuity (fixed monthly income for life), the financial adviser’s hands are tied in terms of retirement planning. However, an adviser can still assist Janet to draw up a budget and show her where she can cut her costs by, for example helping her to find better value-for-money life, medical or general insurance. More than half of pensioners who have an income shortfall, need to withdraw money from a contingency savings plan to survive. If Janet belongs in this group, there may be alternative savings products, with which an adviser specialising in investment planning will be very familiar, that may give her that extra income boost that she needs.