Last Updated on 25/09/2024 by Carl-Peter Lehmann
Financial Planning for Retirement is an ongoing journey and will involve some of the most significant financial decisions you’ll ever make. For many South Africans, the prospect of maintaining financial security in retirement can feel daunting, especially with the rising cost of living and longer life expectancies. Whether you’re seeking professional financial advice for retirement planning or prefer to take a more independent approach, having a solid, adaptable plan is key.
The Importance of Financial Planning for Retirement
Retirement isn’t just about reaching a certain age and ceasing work. It’s about ensuring that your savings and investments can provide a sustainable income to cover your living expenses, healthcare costs, and lifestyle needs well into the future. The goal is to replace your salary with a steady income while managing the risks that come with living longer and navigating inflation. Personalized financial planning is essential because everyone’s retirement goals, financial situation, and risk tolerance are different. Whether you’re at the beginning of your career or nearing retirement, your plan should be tailored to fit your unique circumstances.
A Tough Benchmark: How Much You Really Need to Save and Invest
Recent research by the retirement industry suggests that to achieve a successful retirement – where you’re able to replace 75% of your final working income – you need to invest 17% of your income for 40 years. In addition to this high savings rate, you would need your investments to achieve a return of around Inflation Plus 5% annually.
However, reaching these targets is no simple task:
1.People Don’t Save Enough: Everyday financial pressures, like paying off debt or managing living expenses, often take precedence over saving for retirement. Plus the historical issue of people cashing in their pension and provident funds when leaving jobs – now somewhat negated by the new two pot system.
2. Insufficient Time in the Market: Many people only start saving seriously for retirement later in life, which reduces the benefit of compounding over time. Without a 40-year investment horizon, it becomes harder to achieve your retirement goals. Starting young and staying the course really is the only solution.
3. Low Investment Returns: Many retirement products deliver returns below the Inflation Plus 5% benchmark, leaving savers short of their goals even if they are consistently saving. The average balanced fund return over the last 10 years is closer to 7% p.a. … well below the required 10% p.a. (net of all fees).
These challenges highlight the importance of strategic financial planning and regularly reviewing your investments to ensure they align with your retirement objectives.
Further Reading: Avoid the Worst Performing Balanced Funds – Try to Make Sure You’re in Investments and Funds Consistently Outperforming Their Peers
Financial Advice for Retirement Planning: Top Tips for Retirement Planning Success
Whether you’re at the start of your retirement planning journey or looking to fine-tune an existing strategy, the following tips regarding financial advice for retirement planning can help ensure you’re on the right path to a secure and stress-free retirement. These are some essential considerations when constructing your financial planning for retirement:
1. Start Early to Maximize Compounding: The Most Important Financial Advice for Retirement Planning
The earlier you start saving for retirement, the better your chances of success. Time is one of the greatest assets in investing, thanks to the power of compounding. Even small, consistent contributions early in your career can grow into significant sums over time. If you delay saving, you’ll need to save much more later to achieve the same outcome. The graph below illustrates this well showing compounded values over 20, 30 & 40 years. Your pot of money is 8X larger after 40 years compared to 20 years.
Tip: Set a retirement savings goal of at least 17% of your income each year to maximize your retirement outcomes, particularly if you’re aiming to replace 75% of your final working income.
2. Diversify Your Retirement Portfolio
Avoid putting all your retirement savings into one investment bucket. A diversified portfolio – beyond just your usual retirement investments like pensions and RAs – can help reduce risk while still giving you exposure to further growth opportunities. Diversification protects your portfolio from volatility by spreading risk across different types of investment solutions.
Tip: For South Africans, consider allocating a portion of your portfolio to offshore investments to hedge against rand depreciation and local economic uncertainties.
3. Seek Professional Financial Advice
Managing your own retirement plan can be overwhelming, especially when it comes to tax-efficient savings structures, choosing the right products, and determining how much income you’ll need in retirement. Working with a Certified Financial Planner (CFP) can simplify the process and give you peace of mind that you’re on track to meet your goals. A professional will take a holistic view of your financial situation and create a personalized strategy that covers everything from estate planning to medical costs in retirement.
Tip: A CFP can also help ensure that your savings and investments are properly structured to take full advantage of tax benefits, while also helping you choose the best retirement annuity or pension fund options.
4. Focus on Tax Efficiency
Retirement planning in South Africa comes with significant tax advantages. Maximizing contributions to retirement annuities (RAs) up to the allowable limit can provide you with immediate tax deductions, which can make a meaningful difference to your overall savings. Tax-free savings accounts (TFSAs) are also a great complement to RAs, allowing you to grow your savings without paying tax on interest, dividends, or capital gains.
Tip: Speak to a financial advisor to ensure that your savings strategy is optimized for tax efficiency. Even small adjustments to your savings structure could save you thousands in taxes over the long term.
5. Balance Your Asset Allocation
Your asset allocation will change as you move closer to retirement. Early in your career, it’s wise to take on more risk by investing in growth assets like equities as far as possible, which offer higher potential returns. However, as you approach retirement – and enter the early stages of your retirement years in particular – your portfolio should aim to start managing volatility due to sequence of return risks. More nuanced portfolio construction that starts to incorporate alternative assets like hedge funds and smoothed funds can help with this.
Tip: Review your asset allocation regularly and adjust based on your risk tolerance, time horizon, and market conditions. The way you think about portfolio construction and asset allocation are likely to be different in your pre-retirement vs post-retirement years. Simply ‘throwing’ a few balanced funds together (as is still common in our industry) would not reflect a well-crafted or optimally diversified portfolio.
6. Keep an Eye on Withdrawal Rates
Once in retirement, managing how much you withdraw from your retirement savings each year is critical to ensuring your money lasts as long as you do. A traditional guideline is the 4% withdrawal rule, which suggests withdrawing no more than 4% of your retirement savings each year. However, with changing market conditions and increasing life expectancies, this rule may not always apply.
Tip: Work with a financial advisor to determine a sustainable withdrawal rate that fits your retirement timeline and lifestyle, and be prepared to adjust this as circumstances change.
Now Read: Essential Investment Advice for Retirees
Financial advice for retirement planning is as much about applying common sense like living within your means so you can consistently invest towards securing your financial future, as it is about finding the next ‘best’ investment strategy. If you haven’t saved enough or for long enough … you will have to make trade-offs around the kind of lifestyle you will be able to achieve in your retirement years.
Latest Trends in Retirement Planning
1. Guaranteed Life Annuities Gaining Popularity
With a more favorable interest rate environment, guaranteed life annuities are becoming increasingly popular. These annuities provide retirees with a stable, guaranteed income for life, offering peace of mind in a volatile market. Structuring your income needs in retirement is evolving, as many retirees are now blending guaranteed annuities with living annuities to balance income certainty with growth potential.
2. Thinking Globally: Retirement in Foreign Currency Terms
More South Africans are viewing themselves as global citizens, and this shift means retirement goals are no longer just measured in rand terms. Increasingly, individuals are thinking about their retirement needs in foreign currency terms, like US dollars. This trend is driving a greater focus on offshore investing as a core component of retirement planning. Offshore investments can provide a hedge against local currency risks and offer access to a broader range of global growth opportunities, helping to secure financial security in retirement.
Now Read: Offshore Investing 101 for South African Investors
3. A More Dynamic Drawdown Strategy
Traditionally, retirees have followed a fixed withdrawal strategy, where they withdraw a set percentage of their portfolio each year and increase it annually to keep up with inflation. However, a more dynamic drawdown strategy is gaining popularity. In this approach, withdrawals are adjusted based on market conditions, meaning there may be no inflation adjustment in poor market years, and larger withdrawals when the market performs well. This flexibility can help extend the longevity of a retirement portfolio by reducing pressure on savings during downturns.
4. Modelling for Different Income Outcomes
Many retirees have varying income needs throughout their retirement. For example, they might require a higher income early in retirement when they’re still fit and healthy and more likely to travel or engage in activities. Later in retirement, they may need less income for leisure but face higher medical-related costs. Modelling different income outcomes – higher spending in the early years and reduced spending in the later years – while planning for increased healthcare expenses ensures a more accurate and adaptable retirement plan.
Conclusion: Take Control of Your Financial Planning for Retirement
Retirement planning is an ongoing process that requires discipline and regular adjustments. Whether you choose to manage your planning independently or seek professional advice, the key is to start early and adapt as your circumstances change. Financial security in retirement is achievable with the right plan, realistic goals, and a commitment to keeping your strategy up to date. At Henceforward, we specialize in helping South Africans create effective, flexible retirement strategies. If you’d like to explore how we can help you secure your financial future, contact us for a free consultation today.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward with over 20 years experience. He is a CERTIFIED FINANCIAL PLANNER who takes his responsibility of helping his clients achieve their retirement goals very seriously.
