Long live the pensioner...

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 4 November 2010

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LISTEN TO LIFE COMPANIES and you'd think most pensioners are headed towards Skid Row rather than their golden years. It seems the problem is that pensioners are simply having too many of those golden years. European governments are currently looking at extending the retirement age to 68 or 70. In South Africa, with our youthful - and unemployed - population, the trend is to try to lower it to 55.

Sanlam conducts an annual survey that invariably reveals the need for more saving. Danie van Zyl, head of guaranteed investments at Sanlam Employee Benefits, says 60% of pensioners say they don't have enough money and its advice (echoed by the life industry) is that people must start saving earlier.

Other revealing statistics are that on leaving a job two-thirds of people opt to cash in their retirement savings and, worst of all, 47% of members say they have "no idea" of what their retirement savings are invested in.

While life companies have a vested (and laudable) interest in increasing South Africans' rate of saving towards retirement it does ignore one fact: a high percentage of people have no desire to retire at all (least of all at a youthful 55) but want to be productive to society till they drop. Financial advisers remonstrate at least a third of people will have to work in retirement because they haven't saved enough and maybe 40% more will work to supplement their pension.

But perhaps they don't want to be idle. Often those years around retirement age are a person's most productive: they save the greatest proportion of their retirement fund in the five to 10 years before retirement and are typically still at their mental - and sometimes even physical - peak. The children have left home, most debt is paid off and they're just stashing in.

Nonetheless, financial adviser Bryan Hirsch says that five-to 10-year burst is too late, as they've missed out on the benefit of compounding over their lifetime, which ultimately contributes far more than the actual capital.

For that reason it's becoming increasingly obvious worldwide it's virtually impossible to save enough for a comfortable retirement, considering people can spend as many years in retirement as they spend saving towards it - especially women, with their slightly longer lifespan. Current low interest rates (zero in some parts of the world) mean pensioners are eating into their irreplaceable capital every month.

Speak to almost anyone about retirement and he/she is either continuing to work, in or out of the corporate environment, or heavily supplementing his/her income with freelance work. It isn't always due to financial need but to fill those long hours that might otherwise be filled with misgivings about his place in the hereafter.

Allan Heynen, a director at BDO Wealth Advisers, says given the fact people can look forward to as much as 30 years in retirement, long before any investment decisions are made three key questions need to be answered to make available capital stretch further.

"Pensioners are going to have to either work after their retirement age, take greater investment risks or cut back their lifestyle,"

Heynen says. He claims many of his clients continue working post-retirement well into their 70s.

Hirsch says compounding a pensioner's challenge in retirement is the inflation rate for pensioners is well above the average. "Medical scheme premium increases both last year and this are running at double the CPI rate, as are other key costs, such as electricity, rates and taxes and transport. I'd estimate the inflation rate for pensioners at 8% to 10% - and they don't have the advantage of lower interest rates because they ought not to have debt."

Hirsch describes the phases of retirement: the first few years, where pensioners are extremely active doing all the things they never had the time to do before "and spending money like they have never before", often involving travel. Then in their 70s pensioners quieten down and become more passive before entering their frail stage. In that final stage, costs fall sharply as pensioners simply don't do much, don't eat much or entertain themselves to any great degree. "If they were spending R20000/ month during that stage you might budget down to R15 000/month," says Hirsch.

COPY: Eamonn Ryan
29 Oct 2010

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 4 November 2010