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Mistakes that ruin your retirement

According to a commonly accepted statistic, around 94% of working South Africans do not save enough for their retirement. A major contributing factor to the chronic lack of savings is a lack of basic education about the need for effective retirement planning.

This is according to Gavin Came, Chairman of the Financial Planning Committee for the Financial Intermediaries Association of Southern Africa (FIA) who says there are a number of common misperceptions about how to effectively save for retirement. “It is critical for consumers who are concerned about saving for their retirement to consult an experienced financial advisor who above all is able to assist those who may be most prone to deviate from their financial goals. Surveys undertaken by the financial planning group, ACSIS have shown that people with financial planners are up to 50% more comfortable that they have done enough for their retirement than people who do not have a financial planner.”

Came says one of the most common reasons for not implementing a retirement plan is the perception of many small business owners that the disposal value of their business will secure their retirement. “The fact is, because the business owner is contemplating retirement at this crucial time, the value of the business automatically diminishes. Also by their nature, small enterprises are linked to a particular market or sector and should a downturn in that sector  coincide with retirement of the owner, a retirement plan based purely on business disposal can be destroyed.

Came says depending on the type of business there may also be a long lead time in actually selling and often buyers wait for a lower price, knowing that the owner needs to retire. There is also the very real possibility that it won’t be sold at all. “The best way of limiting the impact of this is to use other retirement vehicles such as Retirement Annuities to diversify away from total or significant dependence on this one source of retirement capital or, as a last option, allow time to secure a good price for the business.”

“Another major mistake is spending withdrawal benefits after changing jobs.”

Came says compared to the past where people usually remained in one or two roles at most,  the modern day working person typically enjoys a number of jobs in their working life,. “One of the consequences of this trend is that people are more regularly tempted to take their accumulated retirement capital from each of these jobs when they resign. Worse still, a number of people deliberately switch jobs to gain access to their accumulated retirement benefits. As a result, when they eventually retire, their only capital available is the retirement fund from their final place of employment, which is never enough to retire comfortably.”

“It is critical that accumulated retirement benefits are preserved in a registered Preservation Fund each time that someone changes jobs to ensure a comfortable retirement or they may find themselves in a very precarious position.”

Sometimes the choice of investment mix can also create problems when it comes to retirement. “On the one hand, people tend to exit equities too soon, especially given longer life-spans, and thus lose out on important growth. While on the other hand, desperate individuals may opt for high volatility investments at a late stage in order to make up lost ground and may then come unstuck. Asset allocation is crucial and must be carefully monitored against changes in one’s lifestyle.”

Another common mistake in retirement planning is not starting early enough, says Came. “The most effective period for generating retirement savings begins with a person’s first job. Usually without dependents and related commitments, those who start early are able to set aside a disproportionately higher percentage towards long term savings than they might be able to do later in life. Coupled with the power of compound interest, these early savings efforts can result in the biggest portion of ultimate retirement capital.”

Came says procrastinating when it comes to planning for retirement is also a big downfall. “This comes in many guises, a few common excuses including: ‘I am planning on emigrating so what is the point of investing now’ or ‘I want to be sure of my employment before I commit ’. Inevitably as retirement looms these deferments will have created larger and larger holes in funding retirement.”

“Everyone wants to retire comfortably, at a decent age, however in order to do this a certain degree of good financial planning and incremental sacrifice needs to begin at a younger age. Seeking the advice of an qualified financial advisor who can determine the most effective retirement plan tailored to a person’s specific lifestyle is the best way to ensure your golden years are truly golden,” concludes Came.

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