Modern-day retirement: Challenges and opportunities

Oratile Bam, Paraplanner, BDO Wealth, Johannesburg

Retirement is a significant milestone in life, representing the culmination of years of hard work and the beginning of a new chapter filled with opportunities for personal growth, relaxation and adventure.

However, is it a good idea to retire before the age of 60? In today’s world, where people are living longer and the cost of living and healthcare are rising, retiring before 60 presents both opportunities and challenges.

Don, a 56-year-old man, has worked for the same company for the last 15 years and has recently been contemplating taking an early retirement. The reason, tiredness. He no longer has the drive to work every day and would rather take his money and enjoy retirement. He did work hard for it, right?

As a financial planning professional, he approached me for advice on how to go about it. The first question he asked me was if it’s possible. Short answer, yes. Is it advisable? No.

Retiring at 55 in South Africa is possible, but it requires detailed financial planning and careful consideration of the country’s unique economic and social factors. Like in many countries, early retirement in South Africa has challenges around inflation, healthcare and ensuring savings last through an extended retirement.

Here are some key factors that you need to be aware of:

Financial preparedness and retirement savings

Retirement savings goals:

The recommendation is to save at least 15–20% of your income throughout your working life to achieve a comfortable retirement. In South Africa, it’s commonly advised to have 20–25 times your annual income saved by the time you retire. For early retirement at 55, this amount may need to be larger due to a potentially longer retirement period. The challenge is to make sure that your investments continue to grow even after retirement to keep up with inflation and support a retirement that could last 30 years or more. A well-diversified portfolio with a mix of growth and income-generating investments is essential.

Pension and provident funds:

South Africa’s pension system includes private pension and provident funds. These generally allow you to access your retirement savings from age 55 without tax penalties. However, the amount you’ve saved must be enough to sustain a potentially longer retirement.

Tax implications:

Retirement withdrawals are taxed according to South Africa’s retirement tax tables. Check that your withdrawal strategy minimises tax liabilities over time.

Healthcare costs

Medical aid:

South Africa’s public healthcare system faces challenges, and many retirees opt for private medical aid. However, medical aid contributions can be expensive, especially as you age and healthcare needs increase.

Gap cover:

Medical aid schemes may not cover all healthcare costs. Gap cover insurance can help fill the difference between what medical aids pay and what healthcare providers charge, but this is an additional cost to consider.

Healthcare inflation:

Medical costs tend to increase faster than general inflation, so you must plan for rising healthcare expenses over time.

Longevity risk and sustainable withdrawals

Extended retirement period:

Retiring at 55 means you may need to fund a retirement of 30 to 40 years. To avoid depleting your savings, it’s important to follow a sustainable withdrawal strategy. A popular guideline is the 4% rule, which suggests withdrawing 4% of your retirement savings per year. However, in the South African context, due to higher inflation rates, you might need to be more conservative and aim for a 3.5% withdrawal rate.

Living annuities vs. life annuities:

When you retire, you’ll have the option to convert your retirement savings into an annuity. A living annuity gives you control over your investments and withdrawals, but there’s a risk of outliving your savings if they’re not managed carefully. A life annuity provides guaranteed income for life, which can offer more security, but with less flexibility.

There are also emotional aspects to consider about retiring early.

Losing your daily routine can often make people feel as though they’ve lost their sense of purpose in life. Finding purpose after retirement is about staying engaged, connected and fulfilled. It’s an opportunity to redefine your identity outside of your career.

Whether through hobbies, exploring your passions, volunteering, learning or creating, the key to a meaningful retirement is to remain active, social and to be intentional in how you spend your time.

Conclusion

Retiring at 55 in South Africa is feasible, but it comes with several challenges, such as ensuring your savings last for a potentially long retirement and managing rising healthcare costs. You need to account for inflation, healthcare costs, and a potential reliance on investments to generate income. Having a well-diversified portfolio, a sound retirement drawdown strategy, and comprehensive healthcare coverage are critical for sustaining a comfortable retirement.

So yes, Don, you can retire.