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!
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:
What to look out for, though
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.