Consider a simple home cooked dinner for two – Chops and Vegetables with a glass of red wine. The cost today is approximately R158. Acceptable in today’s financial terms.
Until you look at what this same dinner will cost you when you retire.
If you retire in 10 years’ time inflation will increase the cost of the same dinner for two people to R283. (Almost double). These figures will increase experientially if you have 20 to 30 years before retirement.
Average inflation of between 6% and 8% since 1985 has pushed the dinner ingredients up by R125. You may say but the inflation in South Africa is now around 4 -5%. That is what is reported. However, consider the real ongoing price increases when you purchase your monthly household groceries.
These figures can give you a need to look at your retirement plans differently.
CONSIDERING INFLATION OVER TIME.
Beating inflation is only half the battle. The other half is having enough saved in the first place,
Industry numbers are sobering. Retirement Specialists have long used 75% of pre-retirement income as a benchmark for a comfortable retirement if you hope to enjoy a similar lifestyle that you are currently experiencing once all your biggest costs (fuel for commuting, work clothes, bond repayments savings and other components) fall away at retirement.
Industry figures however show that the actual net replacement ratio most South Africans are on track for is between 30% – 40%
Below is an example of the difference in real terms:-
If you are a couple earning a total of R100 000 per month before retirement, then you need R75 000 per month to maintain your lifestyle.
If your retirement savings are only 30% you will need to live off R30 000 per month without taking into consideration the tax on the income and increasing medical expenses, especially as you both age. The average retired couple are currently paying around R12 000 a month for medical aid.
This will have a huge impact on your lifestyle post-retirement.
WHY IT IS IMPORTANT TO CHANGE YOUR RETIREMENT SAVINGS STRATEGY
Avoiding the situation of old age costs out running your retirement funds isn’t as difficult and alarming as it may sound.
The objective is for your investments to grow at a faster pace than inflation.
Should your retirement funds grow at 5% per annum, and inflation runs at say 7% you lose buying power every year. The best scenario is for your savings to grow at 10%.
You are gaining 3% in real terms and that’s the number that matters.
It is only human nature to look for conservative, low risk investments because of the fear of losing money, especially as you near retirement.
The longer the term of being cautious before retirement is a risk in itself.
You may be afraid of holding equities because of the threat of market correction.
Historically equities have been the most reliable ways to outpace inflation over the long term.
WHAT ACTION SHOULD YOU TAKE.
There is very little that we as individual investors or Pension Fund Managers can do to influence the markets so we need to accept that prices will rise and fall. A classic example of this is seen in the ongoing war between the US and Iran. When the ongoing talks of a settlement between the two parties appear to be positive the value of stocks increase and vis versus when the talks collapse.
What we can control is the habit of continuing to contribute to your retirement funds and savings. Tax refunds and bonuses are an excellent way of adding to your capital retirement savings in addition to your monthly commitments.
The most important decision is to stay invested when the markets get bumpy.
Losses are paper losses unless you withdraw the funds when the markets have fallen. The goal is to think long term.
There is a need to be proactive and review your retirement strategy with your Financial Advisor regularly to ensure you are reaching the replacement ratio you are going to need when you eventually retire.
The true test of your retirement savings isn’t the value on your quarterly statements; It is what that number can still purchase for you and whether you will be able to spend R283 per evening on a simple dinner for two in 10 years’ time.
Definitely food for thought.
