Retirement

PART 8: What can I do if I don’t have enough money to retire?

Nine tips to help you increase your retirement savings pot.

You’re in your forties, you’ve done the sums, and the situation at retirement age is not looking pretty. Before you give up all hope, wallowing in regret over not starting to save for retirement on day 1 of your career, and not preserving your retirement savings when you changed jobs, don’t despair! You may need to be more disciplined and aggressive in your approach, but there is still time to create a nest egg.

Follow these 9 practical tips to help improve your situation:

  1. Start immediately

    The sooner you start saving, the more time you will have to save, and the longer you will benefit from the power of compound interest – earning interest today on interest you earned yesterday. Don’t delay for any longer: each month that you put off saving in favour of spending either increases the amount you will have to save, or pushes out the date at which you will be able to retire.

    Starting to save for retirement is like planting a tree. The best time was 20 years ago, the second best time is today!

  2. Save more

    Naturally leaving it late means you will need to save more each month than if you had started sooner.

    Consider this simple example:

    If your goal is to save R100 000 in the same timeframe, you could achieve this objective by investing R500 a month (assuming a 10% return) if you start today. Delaying saving for 24 months will increase the amount you need to save per month by almost 40% (or an extra R200 per month) to reach the same goal of R100 000 10 years from now.  With less time on your hands, the cost of a delayed start naturally becomes even more pronounced. Waiting five years means you will need to save around R1300 per month, more than double the amount than if you started immediately, to achieve your goal in time.

    If you apply this thinking to retirement savings, you would need to consider how much you need by a certain date and work back from there to figure out how much you need to save each month. If the figures are not doable, you may need to give yourself more time to achieve your goal. In addition, you will need to look for investments that will give you higher returns.

  3. Delay retirement

    Postponing retirement and continuing to save during the years you work can have a significant impact on the income you enjoy in your golden years. While deferring retirement is not the most attractive option, it has a doubly positive impact in that you have more years to save and fewer years to live off your savings.

  4. Prioritise your retirement savings when you get additional income

    You can do this either by splitting each individual income boost you receive or alternating between improving your current lifestyle and increasing your retirement savings.

  5. Choose the right products

    Do your research thoroughly before committing to a particular product. Look at the various retirement fund providers, compare fees, scrutinise exit costs (choose a provider which has no exit penalties) and make sure you have a complete understanding of the investment you are getting into.

    In addition to your retirement fund, you could consider supplementing your savings with a tax-free investment account or a unit trust, which both give you more flexibility and easier access to your investment. (Go back to Part 5 of this series for more detail on each product.)

  6. Don't be too conservative

    You cannot afford to be too conservative if you start saving late. Shares have performed better than other asset classes such as cash and bonds over the long term and while returns may be a bit up and down, this volatility tends to smooth out over time.

    Deciding how much to invest in different asset classes is tricky. The best bet for most investors is to hand over the asset allocation decisions to an experienced investment manager, by choosing an asset allocation fund such as a balanced fund. Your investment manager will pick the best mix of equities, bonds, property and cash to hold at any given time based on the opportunities presented in the market.

  7. Behave sensibly

    Research shows that the average investor earns much less than the funds they are invested in.  This is because, on average, investors make poor decisions about when to buy, sell and switch between investments. 

    The lesson is that investment success is not only about skill. It’s also about behaviour. Investment performance doesn’t come in a straight line. Investors who are taken by surprise by a period of short-term underperformance and sell their investments at the wrong time often miss out on a substantial part of the return.

    Changes in your personal circumstances and in your capacity to take risk should encourage you to rethink your investment strategy, not short-term market fluctuations.

  8. Decrease your income needs in retirement by re-thinking your lifestyle priorities

    If you are worried about not having enough money to fund your desired lifestyle, you may need to rethink your priorities. While you are earning, the idea of making sacrifices may seem hard, but when your salary dries up, you may feel a bit differently about compromising.

  9. Consider getting advice

    If you are uncertain about how much you should be saving, or how your already-stretched budget can accommodate additional saving, or if you need help with choosing the right products and underlying investments, it is worthwhile speaking to a good, independent financial adviser. 

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