WOUTER FOURIE: Beware the retirement risks facing the Sandwich Generation
Risks can be negated with good retirement planning
A while back, we discussed the typical traps we fall into when planning for our retirement. These include issues such as the high cost of health care and increased longevity for future generations.
But there are other risks as well — some within our control, others not. All of them, however, can be negated with good retirement planning. Here are five common risks to retiring comfortably.
1. Early retirement
A generation ago, this might have sounded like a good life goal. Today, everyone is aware that it refers to retrenchments and the all-too-common practice of laying off staff who have become too expensive for a company.
Retiring before the planned age (normally 65 or older) can seriously harm your nest egg, both by diminishing the amount that you save and often by forcing you to draw on your life savings before you should.
Keep in mind that your pension really starts growing when you near retirement, thanks to the power of compound interest, so early retirement can seriously harm your retirement plans.
We all know that R1 cannot buy the same things today that it could 10 or 20 years ago, but we often fail to take this into account when we plan for retirement.
If you have an inflation rate of only 7.2%, the value of your money effectively halves every 10 years. So R10 will effectively be worth R5 in 10 years' time, and R2.50 after the following decade.
This is not the end of the world as you will invest your savings to grow and not stay static. You should not look at your estimated savings in today's money, but rather keep inflation in mind.
3. Poor investment decisions
We see this far too often. People buy an expensive car when they are close to retirement, or use a large portion of their savings to start a new business.
Others get wowed by flashy brochures to invest in poorly performing and expensive retirement or investment products. Remember, these are your life savings, so get good advice and take your time in making decisions that could affect your savings.
Steer clear of the flashy new car and do not let the sudden retirement payout of a couple of million mislead you into thinking you are wealthy — the money has to last you for a long time to come.
4. Adverse investment structures and high costs
In 2004, independent actuary Rob Rusconi calculated that SA has some of the most expensive retirement products in the world.
A rule of thumb is that the more complex an investment product and the more opaque its fee structure, the more money it is going to cost you.
Always be sure to check the cost of your investments and get a clear understanding of the monthly, annual and other fees associated with your pension product and financial advice.
Keep in mind that many of these costs are not dependent on the growth of your port-folio, so you may end up paying fees even though your pension fund did not grow.
One way of preventing this is to refer to the prescribed cost disclosure as set forth by the Association for Savings and Investment SA. The association prescribes certain standards for its member companies and you can request its fee structures, based on this standard — but it's still best to get sound financial advice.
5. Mr Sandwich & Ms Boomerang
This risk is not always in your control and it is unfortunately a reality for many South Africans.
The Sandwich Generation is characterised by people who find themselves
suddenly caring for ageing parents who did not prepare for their retirement, and dependent children.
This causes a double cost whammy that can quickly drain available savings.
The Boomerang Generation sees their adult children return home from, for example, a failed business or marriage. This leaves the parents, who may be on the cusp of retiring or who have already retired, to care for the child(ren) and perhaps their dependants too.
Both these very common occurrences can seriously damage your long-term retirement prospects.
As always, a good, independent, certified financial planner can help you mitigate many of these risks and help you cool your heels when you want to make a big, or stupid mistake with your life savings.
An adviser can also often help you make tough but necessary decisions concerning your parents and/or adult children.
• Fourie is an independent financial planner and former winner of the FPI's Financial Planner of the Year award. He is the co-author with Bruce Cameron of The Ultimate Guide to Retirement in South Africa.