Retirement is changing – what is the new normal?

Have you ever looked back and remembered what your parents or grandparents were like at your age? While we might not have noticed it while it was happening, we humans are slowly evolving and changing. We just have to look back at our parents or grandparents and what their ‘retirement’ looked like to see how times have changed. There are several forces at work – we are living longer, and ageing better – 60 is the new 40. Retirees today aren’t worn out – but when retirement can last decades they can soon get bored.

The Silent Generation and the older Boomers are familiar with the trend of staying in one or two jobs for the whole of their life, and diligently putting money away for retirement and preserving pensions when they move jobs. When I first entered the job market in the 80s, the optimal time span in a job was considered to be around 7 years (to the dismay of the Silent Generation bosses who considered that to be ‘job hopping’) but today it is closer to 2 years. Even back in the 80s, we knew that the only way to get a meaningful salary bump was to change jobs. The unintended problem with this is that ‘preserving’ (to keep the tax advantages) one’s pension on a much smaller lump sum mostly fell by the way, in the understandable (but ultimately mistaken) belief that you had time to catch up.

I get it, Retirement Annuities in the ’80s to mid-noughties were, frankly, a toxic investment vehicle with brokers taking huge upfront commissions and fees which locked investments in with ‘early termination penalties’. This  eroded whatever returns the investment managed to eke out. I keep coming across clients who refuse to touch them for just this reason. (The good news is that the industry has come a long way in the last 2 decades, but there are still old-school brokers lurking in the shadows. My next post is going to be a cheat sheet on how to not get caught by this sort of snake-oil salesman).

The last of the Baby Boomers turn 60 this year, but already retirement is changing. Look, there are even some of the Silent Generation who are hanging in there, in the US two of the (not so silent) generation octogenarians Trump and Biden are duking it out to run the (once) most powerful country on the planet.  (Just as a reminder here are the generations:  the Greatest Generation (1901-1924), Silent Generation (1925-1945), Baby Boomers (1946-1964), Generation X (1965-1980), Millennials (1981-1996), Generation Z (1997-2012), Generation Alpha (2013-2025)).

Retirement funding is a huge issue, globally. In countries (like Europe and the US) that have some sort of old-age social security pension – which is built on a defined benefit model, rather than the defined contribution model we in RSA are more familiar with in the private sector. Those models assume that there were always going to be masses of new entrants into the workplace who will pay those benefits – because the invested benefit pot that was supposed to grow over decades is declining and is just not going to be able to pay pensioners 20 years out.  The actuaries who put the assumptions in place decades ago couldn’t have foreseen the impact of longevity and dramatically reduced birthrates. European and US pension schemes is going to require a rethink. Contrary to this. the Old Persons Grant (as it is now called) in RSA is different and paid out of government coffers, aka taxpayer funds. It is also means-tested (you’re only eligible if you do not earn more than R86 280  if you are single,  or R172 560 if married and do not have assets worth more than R1 227 600 if you are single or R2 455 200 if you are married and frankly pays just R2090 per month).

More than 75% of retirees cannot afford to retire at all, and the percentage of retirees who will have to cut back on their lifestyle is even higher than that.

Retirement is not a date or age, it is that time when you decide that the capital you have saved and invested, now needs to work for you and produce an income.  
As uncomfortable as it is, you need to know at least 10 years away from retirement if you’re going to have enough capital to produce an income to retire on. Putting your head in the sand never makes the problem go away, and just exposes your vulnerable rear end to whatever is coming your way. This is very important if you are a salaried worker. Your contract has an expiry date, and there is no guarantee they will keep you on a ‘contract’ thereafter. Step one is to get some idea of what you’re spending now, and which of these items are going to change at retirement (don’t worry about inflation, do it as if you were retiring today – your advisor can do the future projections.)

Tip one: Don’t rely on investment growth to make up for not having made enough contributions to the investment. At the very best assume that it will maintain the purchasing power (in other words grow enough to keep up with inflation).

Once you know the income you need in retirement you and your advisor (or app) can run some scenarios as to when you can retire.

Don’t be disheartened if the outcome isn’t what you expected, given time there are   several variables you have control over to change the outcome:You can save and invest moreYou can consume less now or plan to consume less in the futureYou can invest it optimally (but see Tip One above)You can retire later/work longer/semi-retireReduce liabilities (parasitic progeny being the biggest problem for Boomers)The original assumptions, (as late as 2007 when I first started  my studies in this field) were that you’d live 20 years max, post-retirement – in other words 80- 85. Using this assumption, a financial advisor could allow a capital amount designed to produce an income/pension to be depleted over 20 years, comfortable in the knowledge that for 95% of their clients, they wouldn’t outlive their money. That is no longer true (and frankly wasn’t even true then). You now have to assume at least 35-40 years post-retirement. The added complication is that Gen X’ers coming down the retirement pipe usually want to retire earlier than 60/65, not later.

Tip Two: Owning your own home in effect ‘prepays’ your rent in your retirement. This could account for 1/3 of your income so don’t dismiss it (levies and utilities have to be paid irrespective of whether you own or rent). One of the biggest wealth killers is to change homes too frequently. Every time you do that you lose at least 10% of the value of that property.  Think carefully about where you’re going to retire a long time before it happens. Make peace with the fact that you’re probably not going to save any money in the move but you may want to do it for security reasons and to have easy access to frail care (be warned, it is not free, and could cost an additional R25k pm).  

Don’t fool yourself, holiday homes are a vanity purchase, a black hole into which you throw capital and maybe justify it to yourself as ‘for your retirement’. Property, especially residential property, has long since lost its lustre as a good investment. Look at the graph below – you’d have got a better return from the money market (before you consider all the other expenses like rates, insurance, maintenance etc).
 Source: Trading economics: South African residential property prices

Tip 3: Consolidate and get your ducks in a row. After several decades of trying out different products, listening to different advice etc, I find that my clients often have investments scattered around without any thought to aligning them to the end objective – getting them to work for you when you don’t feel like working anymore. This is not to say that you should have different buckets of investments. The smarter thing to do is to take all of your investments, put them all on one page, merge where it makes sense, and align them with their end objective. Coming into retirement it is often a good idea to consolidate your investments (This does not necessarily have to be a CGT event but can usually be done via a Sec 14 (for formal retirement funds) or change of broker (flexible investments). Watching all your investments on a single table monthly (like Excel) means that you’ll have no nasty surprises at retirement (your wealth advisor may even do that for you). Consolidation like this often brings down fees (and before you say that an extra 1% doesn’t matter, consider that on R1m that is R10,000 p.a If you like cappuccino’s then you can have one at a sit-down restaurant every 2 days and still have change left from the saved fees).

Once you know what your capital requirement is for retirement, ensuring that it provides for your income despite market growth will allow you to ring-fence that portion of capital for your retirement objective so you know that as long as you stick to the plan, your retirement is sorted. If there are leftovers (yes, it does happen especially if you plan properly) then you can discuss with your advisor how to invest that nest egg. Many of our clients  (choose?) to take it offshore (properly offshore as I discuss in this blog but you do not have the same restrictions as you have with your retirement kitty.   

Tax efficiency is critical especially between spouses. We beleaguered taxpayers are going to be the golden goose that the government is going to try and bleed dry without killing us.  This tax efficiency is going to be different for everyone, but some of the things you can do (and run what-if scenarios on) are using tax-free donations between spouses to maximize your deductions and allowances. Understanding your tax bracket is as important. While you’re at it, both spouses need to understand where and how the retirement funding is being funded. Inevitably one of you is going to pre-decease the other, …..make sure the survivor isn’t left in the dark.