Many people plan for their retirement from a young age. It normally entails contributions to pension, provident and retirement annuity funds and it could include contributions to normal unit trusts as well. During the build-up period very few take the time to actually check or solicit advice to determine whether the planning would be sufficient or not. At best the pension funds send statements once a year and some portray a robot depicting green, amber and red lights trying to inform the member whether their provision is on track or not. The problem with this is the fact that the pension fund doesn’t have statistics of other personal provision but as a start it is better than nothing.
Unfortunately, life changes over time and a plan that started off well could easily run into problems as time progresses. Over the past 30 years variables such as, interest rates, rates and taxes, electricity, water etc changed in line with inflation. Of late these variables all change at a faster rate than the current inflation rate. The result is that ordinary planning, where one goal at retirement is targeted becomes obsolete as many different variables could result in retirement.
Some solutions to this problem could be better scenario planning where various inflation rates are modelled during the build-up phase to determine what the outcome could be under the various circumstances. Another solution could be to target higher returns which would result in more market volatility that could result in investors being more anxious during times of high volatility or declining markets. The danger of this is that investors might act irrationally by exiting the market when markets have lost value. Once this has been done it is very difficult for such an investor to re-enter the market later, placing them out of sync with market movements. Investors normally only re-enter markets once it has advanced materially. By doing this (market timing) they enter cycles of selling low and buying high resulting in the destruction of wealth over the long term.
Other factors wreaking havoc to investors’ retirement provision is the sandwich generation phenomenon where retired investors are financially responsible for children still in the house as well as the necessity of looking after ageing parents. This additional burden on investors have resulted in family relationships breaking up exactly at a time when family should rally around one another.
Even though we all depict retirement age as 65, the reality is that many companies’ retirement age is still 60 in an attempt to accommodate younger employees. This early retirement places tremendous strain on retirees as their capital now has to last even longer.
A new frame of mind is necessary where we discipline ourselves to work longer even though it might entail starting a whole new career after the age of 60, to compensate for all the unexpected expenses in retirement as well as the unexpected and unplanned higher rate of increases in commodities as earlier explained.
Active economic activity is arguable the best antidote for problems in retirement as well as the early onset of many medical problems.