Article by Mathias Sithole, Liberty Corporate: Principal Actuarial Consultant – Liberty
2017 has seen significant market volatility. Following from the credit downgrade, the cost of living continues to spiral and consumers increasingly battle to make ends meet. It therefore comes as no surprise that an alarming number of South Africans don’t even think about saving, let alone saving or investing money regularly to ensure that they to make provision for their retirement.
As difficult as it may seem to put away an amount of money in these tough economic times, fact is that the longer you postpone it, the tougher it becomes and the less money you will have when you may most need it: in your retirement years when you may have no other income.
“There’s an interesting proverb which reads ‘The best time to plant a tree was 20 years ago. The second best time is now.’ Ideally people should start saving for retirement as soon as they possibly can. For most, this should be when they initially begin working. However, if you haven’t been saving towards your retirement, it’s never too late to start,” advises Mathias Sithole, head of public sector and corporate consulting at Liberty Corporate Consultants and Actuaries, a division of the Liberty Group.
The first step is to familiarise yourself with the retirement fund landscape in order to better understand what corrective measures need to be taken, what risks are being borne and how to plan better for your retirement.
Previously, with the old defined benefit funds, member’s retirement benefits were based on their salary at retirement and their service at the employer. Their pension at retirement was promised to be a pre-determined percentage of their salary prior to retiring and could therefore allow for easier planning around retirement income matters.
Defined contribution funds, which are currently the flavour of the day, operate much like a savings account. Any contributions made to the fund, together with investment returns after allowance for any fees, grow into a lump sum which the member has to use to purchase an income at retirement. Neither the lump sum at retirement nor the terms at which the income can be purchased are known in advance. They will depend on many factors, including:
- Level and length of time of any contributions being made;
- Investment returns and portfolio choices being made;
- Preservation of benefits over the working lifetime;
- Market conditions at retirement which will impact on the terms of purchasing an income; and
- Level of fees and expenses.
With so many variables at play, it is little surprise that members struggle with retirement planning.
So where do you start?
Once you have decided and committed yourself to saving and investing some money towards your retirement, it is advisable to consult a financial advisor who will do needs analysis, identify your objectives and requirements and advise you on the options available to you in order to achieve your objective.
“Having said this, you should also be proactive. Prior to meeting with your financial advisor, you need to thoroughly do your homework and take stock of your financial situation, your expenses and your savings needs. So, among other things, consultation with a financial advisor will assist in determining or clarifying the following:
- your current financial circumstances;
- your monthly budget and savings capacity;
- your current retirement savings;
- potential saving vehicles available and appropriateness to your needs.
You must have an idea of your current monthly budget and what your savings capacity is in order to better facilitate the needs analysis,” stresses Sithole.