It’s the end of the tax year, time to ask: ‘Am I saving enough for old age?’. Here’s how to know if you’re saving enough to retire on.
It’s the end of the tax year, time to ask: ‘Am I saving enough for old age?’. Here’s how to know if you’re saving enough to retire on.
No one likes to face up to the question: “Am I saving enough to retire?”. Much like a yearly physical, probing your retirement savings can be awkward, uncomfortable and even a bit scary – especially if you know there are likely to be some health issues. But you’re a grown-up now and it has to be done every tax year. Sygnia’s retail manager Lorna Knoetze gives the run-down on how to stress test your retirement annuity, and what to do if it shows any cracks.
Stress testing your retirement annuity (RA) at least every tax year is crucially important because it’s the only way to know if you’re going to be able to have the retirement you’d like and if your money will last to the end of your days. So you have to regularly check how well your retirement portfolio will hold up in current market conditions.
Put simply: are you saving enough for retirement? To answer that, you need to put your retirement annuity under a microscope and look at:
Income needs
What will these realistically be at the time of retirement?
Inflation
Have you applied inflation to your income and expenditure calculations?
Portfolio size
Is it big enough to suit your expected income needs when you retire?
Portfolio allocations
Will it produce sufficient growth each year to meet your requirements?
Monthly contributions
Is what you are putting into your RA every month enough to achieve your retirement goals?
Time horizons
Have you set aside enough years to save for your target?
TOUGH CALLS
A very few lucky people will pass this stress test comfortably, the rest (94% of South Africans, according to the World Bank) will usually start sweating a bit as they begin to realise how short of achieving their retirement goals they are.
Breathe, you can still fix it. But there’s no easy solution – tough decisions and sacrifices will have to be made, starting with:
Where can I cut spending to save more?
How can I readjust my lifestyle to spend less?
Are there any cash lump sums (like a tax rebate) I can use to boost my RA?
Do I need to extend my desired retirement age by a few years?
The next step is to scrutinise the RA itself and see if anything needs changing. Look at:
Fees
Are fees eating up your portfolio or stunting its growth? According to National Treasury, high fees can cost you up to 60% of your retirement investment over 40 years. It’s a big deal, and that’s why Sygnia always advocates low fees, starting at 0.4%.
Growth
Is your RA growing in line with inflation (at the very least)? If it hasn’t, then perhaps it’s time to switch to something better.
Rebalance
Make sure that your risk exposure is in line with your life stage. For example, if you’re closer to retirement, you might become more risk averse, so make sure you are not overly exposed to equities and perhaps consider a more moderate portfolio. Whereas if you are quite young and would like to push for more aggressive growth, you may want to balance your portfolio towards equities.
If you contribute to an RA via your company check what risk level they have you on, as many companies will change you to a low risk portfolio by the age of 50. But if the investment is already falling short of goals you may need to take a slightly higher risk attitude to grow your money more quickly over the next ten to 15 years. However, always make sure you are comfortable with the volatility of your portfolio.
DIY STRESS TEST
For people who plan their own portfolio and who are not using a financial advisor, there are plenty of online tools to test if you are saving enough for retirement.
I would of course recommend Sygnia’s RoboAdvisor. Robo-advisors will take you through 11 simple steps to ascertain your current retirement position and will determine what sort of retirement lifestyle you are saving for, how much you are saving and more. Based on these, it will calculate what risk level your portfolio should be at for your life stage – low, medium or high risk – and then suggest a suitable portfolio to invest directly in.
When using any online tool to stress test your retirement plans, make sure that it is a planning tool – not simply a financial calculator, because there are financial calculators out there masquerading as robo-advisors. There is a big difference: a financial calculator only works with three basic elements: your risk profile, how much money you need and when you need it by? Based only on this, it will tell you how much you need to invest to achieve these goals and will often point you towards an investment product or a collection of investment products, which are usually quite expensive. Whereas a good robo-advisor is sophisticated software designed to provide you with what constitutes financial advice, and it should stand behind that advice.
Lastly, even if you are using a financial advisor you could use an online tool to stress test your own retirement annuity and then discuss the results and the way forward with him or her. Whichever way you choose to do it, the important thing is to find out if you have saved enough for retirement sooner rather than later.