Retirement: what you should know and what you can do about it

retirement planning investment

The thought of getting old leaves many of us cold. We use euphemisms like Golden Years and Senior Citizens and Mature to make it sound appealing, but there is no getting around the fact that ageing is generally painful. But here you are, brave and ready to get ready for it!

Yesteryear

Some things were simpler, back in the day when ‘the rocks were still soft’ as my grandmother used to say. During 1950 my dad went to work for a government agency. As part of his remuneration package, he was made a member of a Defined Pension Scheme. The rules were simple. For each year worked, 3% of his final salary would be given to him as a monthly pension upon retirement.

This meant that after 30 years of unbroken service he would receive 90% of his final salary as a monthly pension. After 33 years he would be eligible for 100% of his salary as a pension. He could predict his pension at any time. The employer had to make sure that he is protected.

Fast forward to the present

Defined Pension Schemes no longer exist. These were replaced with Provident Schemes supplemented with Retirement Annuities that do not offer a guaranteed pay-out. If the performance was below inflation, you carry the loss. During March to June 2020, because of the Coronavirus, the value of pension funds fell by up to 30%. This means that, though you kept adding money, the actual value of your investment fell.

Inflation can eat the life out of your savings. We know that 94% of people who retire do not have enough money to live on and will take a massive drop in lifestyle. It is not, as it was in 1950, the employer’s job to compensate for the loss in investment. It now is yours – the person who will have to live on less money.

Expensive, modern challenges our parents never had to deal with

You are expected to live quite a lot longer than your predecessors did. This means that you are likely to outlive your income. Retirement products bought 30 years ago did not take the increased longevity into account. Whilst life expectancy for your parents were 20 to 25 years, for you it is going to be 30 to 35 years. Your pension needs to be made of rubber!

Just because doctors can make you breathe and your heart pump for longer, does not mean they can ensure the quality of those additional years. Medical aid has become astronomically expensive. Some years the premiums can go up by 20%. A couple can find themselves paying over R5 000 a month. The medical aid cover a person now needs has gone up by a factor of 300% to 400%.

With advancing age and the frailty that inevitably accompanies it comes greater concerns about security. Older people are easier targets for crime. Whereas in the past the idea was that you buy a house, raise your children and then retire there, this is no longer feasible. This means that older people need to move to ‘retirement villages’. These generally have long waiting lists and may well be the only way to ensure access to high-quality frail care services later on. In 2019, frail care could cost you up to R25 000 a month. Should a person develop Alzheimer’s at the age of 60, one could easily pay an additional R3 million for treatment over their lifespan. Government-subsidised care facilities are fully booked and to buy into private schemes you need to invest between R2 million and R2.5 million upfront.

So what can we do to protect our lifestyles?

We suggest you make peace with the fact that your pension and retirement annuities are only going to cover about 45% of your needs upon retirement. If you have capital of R3 million, you are not likely to receive more than R7 000 a month in income. As you will know, this hardly pays for food and medical bills. This is why you made a good choice by enlisting the help of a financial advisor that is not just going to try to sell you more insurance products! At NFS we have a few strategies that we suggest you employ:

  1. Invest in real estate – The goal is to secure rental income equal to another 45% of your income needs. The good news is that, though this requires a significant investment of your capital, home loans are also often one of the cheapest ways to get money from a bank. Don’t worry, we will hold your hand through the whole venture and connect you with the best people to assist you. (We have written blogs that discuss investing in property in greater detail. You can find this in the archive of blogs on our website.) If a bank advances you money at an interest rate of 9% and the rent you get is more than that, then you are using the bank’s money to make money! You will have monthly rent coming in as well as capital gain as your property grows in value.

    If you buy a house for R1 million, it is likely to be worth R3.5 million at the end of the next decade. The rental income is linked to the increased value of the property, not the original purchasing price. Your rental income is generally adjusted to compensate for escalating inflation, therefore automatically protecting your asset from it. Though financial markets are volatile, long-term property investment has shown to be a safe and reliable means of income.
  2. Increasing your active and passive income streams. This should create at least another 20% in income. How would you do that? Well! Here is where we do need to be thankful for better medical care. It does mean that we can do more for longer. It is true that many people are not ready to hang up their working boots and dose off in a rocking chair or crochet doilies all day the moment they reach 65 years of age. (It may SOUND like bliss, but many, many people have reported intense boredom within 3 months of retiring! How do we solve this?
    • Invest in assets that can generate an income – Some people have invested in trucks, earth moving equipment, cranes or even cement mixers and hire these out!
    • Freelance work – Contrary to popular belief, many companies see the value that experience brings. You may not want to work full time, but there are more and more freelance opportunities available. Make sure you are tech-savvy. COVID-19 has taught companies how expensive renting office space is! They would much rather employ people who will work from home. Numerous websites are set up to connect freelancers and prospective employers.
    • Join an agency – There are various organisations or networks for mature moms, grannies and husbands, who will gladly ‘rent out’ your services – be it to take care of admin, drive kids to and from activities, provide child care or to do the DIY projects and odd jobs that working families just don’t get to!
    • Share your talents – Now is the time to put concentrated effort into honing your talents and turning these into a small business. You could teach other enthusiasts hobby skills online. You could create bespoke home or garden decorating items that you can sell through your local nursery or home decorating shop. You may want to grow organic vegetables and sell it through your neighbourhood WhatsApp group, or pickle and preserve your produce and sell these at your local flea market.
    • Answering surveys – Companies often want information from a customer’s perspective. They may use mystery shoppers to complete certain tasks and give feedback on their customer service experiences. Sometimes they may want the person to fill in a questionnaire. Some companies pay people or provide tokens or free gifts in return for a few minutes of your time.

What to look out for, though

  1. If it seems to be too good to be true, it generally is!
    Be aware, not only of badly worded, miss-spelt letters or emails and people with strange surnames, vague stories and overseas phone numbers. Some schemes are very convincing, even to experts.

    If you receive a very official-looking email from a recognisable business, making you an amazing offer you have not asked for, be suspicious. Do not open any files they have sent to you as attachments, before contacting the business independently and verifying that they DID actually send you the email. If anyone asks you to ‘verify’ your details or log in by giving personal information over the phone, stop, drop and roll away.

    If a distant cousin three times removed suddenly appears on your doorstep… This is a scam as old as the hills… The person may have done their homework and speak in broad terms about people you may have known, or events you have been part of. The idea is to get you to trust them so that you won’t ask as many questions as you would of a stranger. They play on your secret wishes and fears and, quite unashamedly, your biases. They will often tell you impressive stories of how they got rich. In a pious tone they declare that all they have left to do on this planet is pay it forward, because you are ‘family’ … don’t open the security gate. Tell Fluffy to bark.
  2. If you don’t know enough you don’t know enough!
    If you cannot give a clear description in under two minutes or answer who, what, where, when and how questions without blinking about something you are about to invest time, energy or money into, you don’t know enough about it. You need to ask more questions. Someone once said you don’t need to know everything, but you need to know people who do. Being super cautious is a good thing! Get a second and even a third opinion. Listen to your gut.
  3. If a recruiter asks you to pay a fee to secure a contract/work opportunity, don’t!
    If it is legitimate, the recruiting agency will be getting their fees from the prospective employer or tender holder, not you.
  4. If they want to rush you as it is ‘a limited time’ offer, slow right down…
    One of the most sure-fire ways to force others to make judgement errors is to rush them. It isn’t a life or death situation. There is no reason to rush into anything.

Final words

Ask yourself this: is it better to look like a fool for being over-cautious and then finding out there was nothing to be suspicious about, or going along with things because you do not want to look like a fool, but end up being fooled? Stay humble. Contact your financial advisor before making any big decisions, even if you are quite convinced of your decisions!

However, don’t let the dark intentions of others frighten you into a state of paralysis! There are decent people in the world. There are productive opportunities in the world. There are positive steps you can take today to secure a better tomorrow. At Northwood Financial Services, we are here to hold your hand.

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