Insights categories - Retirement

The ultimate human race

As investors there is a lot we can learn from marathon runners that can assist us with our own “ultimate human race” – the challenge of retiring financially independent. Borrowing from a marathon runner’s training guidelines, here are five top tips on how to retire financially independent.

Marathon training tip #1: Get a training programme

Runners have no shortage of popular training programmes from which to choose for their race preparation. These programmes guide runners each day of the week on how much to train to reach their race goals. For a successful retirement plan, your starting point is to create and stick to a monthly budget.

Start with a reality check: Keep a “running” total of everything you spend in a given month. Write down every item from your morning coffee to that late-night takeaway. You may find you are spending too much on items you don’t really need. Once you have an idea of where your money is going and where you can potentially cut back, draw up a budget. This will help you to understand how much of your income is required to cover fixed expenses and how much is left to play with. Next you need to think about your spending priorities. It’s at this point that you need to place retirement savings near the top of the list.

Marathon training tip #2: Stick to a healthy diet

A good diet filled with the right nutrients is an essential part of any exercise routine. Marathon runners fear hitting the wall. To prevent this they ensure their body is correctly fuelled. Planning for retirement is no different. Have you been monitoring your financial diet? Are you gaining weight in the area of credit card repayments?  As with food where there are good calories and bad calories, there is good financial debt and bad financial debt. Good debt may help you create value or generate long-term income, for example a bond to buy a house. Bad debt is debt used to purchase items that quickly lose their value. Having a clear understanding of your needs versus wants will assist you in keeping a healthy financial diet. If you can't afford it and you don't need it, don't buy it.

Marathon training tip #3: Pace yourself for the race

Marathon runners understand that running at their own steady and consistent pace gets them to the finish line. However, if they get off to a slow start, or have issues along the way, they may need to make adjustments to achieve their goal. Saving is similar. Your starting point (age) and level of contributions determine the pace at which you will need to save to achieve your goal. 

It is widely held that a retirement income equal to 75% of your final salary will allow you to live at the same standard of living during retirement. This figure accounts for the adjustments many people make as they age, for example, no further retirement savings contributions but higher medical costs. 

Assuming that you will be comfortable living off 75% of your pre-retirement salary, our research indicates that saving 16% of your salary is a reasonable starting point for the 25-year old saver. This required pace of saving increases dramatically the later you start. You need to save 21% if you start saving at 30, up to 39% if you start at 40, and up to 56% if you start at 45! It is important to note that these numbers are simply averages and assume a consistent, inflationary salary increase each year, an inflation rate of 6% p.a., that you retire at 65 and that you earn an average return of consumer price inflation (CPI) plus 5%. Gauge where you are at in your ultimate race, do you need to quicken your pace?  

Marathon training tip # 4: Cross training

Cross-training helps marathon runners strengthen their non-running muscles and rest their running muscles. This process builds a stronger overall runner. Similarly there are different products that can be used in your retirement planning, each with their own unique benefits.

While you may be saving for retirement through your employer’s pension or provident fund, this may not be enough to achieve your goals. While most of our budgets are severely stretched, careful planning and maximising occasional windfalls – such as bonuses or tax refunds – can help us bump up our savings. Consider using a tax-free investment (TFI) or a retirement annuity (RA) to supplement your occupational retirement fund. Both the TFI and RA grow free of dividends tax, income tax on interest and capital gains tax. 

The main difference between the two products is that a RA offers tax savings now, i.e. you pay less tax now because you make contributions with earnings on which you have not paid tax, but you will pay tax later, i.e. you defer paying tax. With TFI products, on the other hand, you use after-tax money to invest, but you pay no tax later; your withdrawals are completely tax free.

With a TFI you may withdraw your money at any time, while with a retirement annuity your money is only available when you turn 55 years of age.

Marathon training tip # 5: Don’t procrastinate

Fearing that the task ahead is too daunting, many new runners procrastinate for weeks, months or even years before they lace up their shoes for the first time and head out on to the road. To become a successful investor, guard against this type of inertia.  The sooner you start saving the more time you will have to benefit from the power of compound interest.

If you started training for the ultimate race at the age of 25 by saving R1 000 a month until you reached retirement age, you would have R5 550 348 by 65 (assuming 10% annual return). The remarkable story here is that 91.4% of your final sum would come from compounding, which means you would have only paid R480 000 over four decades to reach the total amount.

Luckily for many marathon runners, if they fail to meet the cut off time, there will always be next year to try again.

Unfortunately, in South Africa the sweep vehicle in the form of social grants is woefully inadequate to get you through retirement and you cannot rely on this escape route. How you choose to tackle your race is up to you. Our advice is to start “training” today, with the help of an independent financial adviser if you need guidance.

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