I’m 52 and haven’t saved enough for retirement. Is it too late?

I’m 52 and recently got a better-paying job overseas. I intend to retire at 65. My goal is to secure my financial freedom and save enough to last me my retirement period.

My background:

  • All my other debts are cleared except my car, which has a balance of R257 000 (52 months remaining).
  • I put my provident fund in preservation. The current value is R334 000.
  • I have a VIP retirement annuity-linked policy which I took out in 2004 at Liberty. It has a current value of R55 000 and matures in 2023. I haven’t paid premiums for about seven years.
  • Currently, my monthly income minus my monthly expenses is R30 000.
  • I’ve calculated my financial needs and will need R16 000 after tax in today’s terms when I retire at 65.

My plan (using the R30 000 extra)

  1. Open a retirement annuity (RA) and save R7 250 per month.
  2. Open a tax-free savings account (TFSA) and save R2 750 per month.
  3. Save R15 000 in a savings account until March 2020 for a deposit into a bond. I don’t own a property but want to buy a small, easy to manage home.
  4. My current rent is R7 000. I plan to get a bond (maximum R1 000 000) and pay R21 000 a month. Once the bond is repaid the excess money will go to the RA.
  5. Put an extra R5 000 towards the car repayment (I’d like to get rid of this car as I’m aying for something I don’t use; however, I can’t as the contract’s still new).
  6.  I want to be ready for retirement at 65. However, I will only retire at 68.

Are these plans wise? What is your opinion?

Please note that the information provided below does not constitute financial advice; in fact, we are precluded from giving specific advice. Generic information has been applied given the context of your question. We have limited details about you and your circumstances – such detail may impact any advice provided.   

Dear reader

It looks like you have put a lot of thought into your financial future; well done! I’ll get to the numbers side of your plan later on in my response, but to start, here a few opening thoughts:

  • Your asset allocation (your allocation to cash bonds, property and equity both locally and globally) is going to play a big role in your investment/retirement outcome. The largest risk you face is perhaps the risk of being too cautious. You have 13 to 16 years to save as much as you can and make your savings grow as much as possible. By way of example:
    • R1 million invested for 15 years with a 7% return has a future value of R2 759 032
    • R1 million invested for 15 years with a 9.5% return has a future value of R3 901 322.
  • Retirement annuities have many benefits, inter alia:
    • Contributions are tax-deductible up to the prescribed limits
    • Growth within the product is tax-free, and
    • On death, there’s no estate duty or executor fees.

Careful consideration must be given to your product blend, as you need to make sure you have sufficient liquidity during retirement. You may live for 30 years post-retirement and a lot can happen in that time. Retirement annuities have limited liquidity, both pre- and post-retirement. Another consideration is the investment restrictions applicable to all pre-retirement products.

  • Costs are going to play a role in your return, but be mindful that low cost doesn’t automatically translate to a better return. You must target reasonable costs in a portfolio that can deliver your targeted return.
  • You also need to pay attention to the risk side of financial planning, which involves having adequate insurance in the event that you become disabled or have a health event. It may be that you also need life cover in lieu of your liabilities.

Okay, now we can get to the fun part: doing the calculations to check whether you’ll reach your retirement goal within the constructs of your planned savings.

I have had to make some assumptions in order to do the financial projections. Assumption one is that you enjoy a net annualised return of 9% and inflation is 5% per annum; assumption two is that you do retire at age 65, and the third assumption is that once the car is paid off you save the additional R5 000 per month repayment.

  • It will take approximately five years for you to pay off the R1 million bond, assuming an interest rate of 10%. Thereafter, the R21 000 per month will be allocated to savings.
  • It will take approximately 28 months to pay off your car, assuming an interest rate of 12.5%, after which you’ll add the extra R5 000 to savings.

The future value of your savings at age 65 would look like this:

Description Current value Future value
Existing RA and preservation funds R389 000 R1 192 598
New RA R7 250 pm R2 150 366
New TFSA R2 250 pm R667 355
Bond money (8 years of payments towards savings) R21 000 pm R2 959 007
Car money (128 months of payments towards savings) R5 000 pm R1 076 250
TOTAL R 8 045 576

 

At age 65, your current required income of R16 000 per month translates to R30 170 using our assumed inflation. We ran the numbers using our return and inflation assumptions, and the good news is that you would only likely run out of capital at age 130. There are, however, three major things to consider in these types of calculations:

  1. Returns are calculated in a straight line (sequencing risk).
  2. The terms are very long; small changes in assumed return and inflation can have a big impact.
  3. The projections don’t take into account any ad hoc lump sum you’ll require along the way.

Following on from point 2 above, if we assume that inflation averages 7% instead of 5%, your capital runs out at age 96. Now, keep inflation at 7% but drop your return to 8%, and you risk running out of money at age 91.

Your safest plan will be to work as long as you can – and save as much as you can along the way. It’s also important to remember to live, and to enjoy some of the fruits of your labour.

Good luck!

Stephen Katzenellenbogen is an NFB Private Wealth Manager

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