The cost of delaying retirement savings

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BOITUMELO NTSOKO: Retirement planning often seems like a distant concern, and because of this view many people develop the habit of delaying their retirement planning. Usually the thought process might be, ‘I have time, I’ll get to it later’; but what appears to be a minor postponement can have significant repercussions. 

In this episode, I’m joined by Craig Torr, who is a certified financial planner at Crue Invest. He’ll be delving into the hidden costs and the stark realities of procrastinating on funding your retirement. Welcome to the podcast, Craig.

CRAIG TORR: Thank you very much, Tumi.

BOITUMELO NTSOKO: We often hear the statistic that only 6% of South Africans can afford to retire comfortably. Can you please break down for us why this is?

CRAIG TORR: I think there are a number of reasons, the biggest one probably having to do with our need for instant gratification. The opposite of saving is spending and it’s a helluva lot easier to spend than it is to save. We tend to think that retirement is such a long way away, we can catch up at a later stage. That’s probably one reason. 

Then on a more practical level, I suppose, [there are those] early withdrawals from retirement funds. When people job-hop, they tend very often to cash in what they’ve accumulated, not quite fully understanding the consequences of doing so.

So, for example, that money, had it remained invested, would’ve doubled its purchasing power after a period of around 14 years. I’m assuming growth of inflation plus 5%, which is what one can expect in a retirement fund. 

But if you make that withdrawal very early on in your work career, you potentially have given up anything up to eight times the amount of money that would’ve been available had it remained invested until your retirement.

So it compounds against you when you do those early withdrawals. That’s probably one of the biggest reasons for people not having sufficient [funds] at retirement.

BOITUMELO NTSOKO: Craig, people are often encouraged to start planning for their retirement early. Can you give us the advantages of doing so?

CRAIG TORR: Look, there’s the obvious advantage of compounding. As I illustrated previously, the longer your money is invested, the more time it has to compound – effectively around an eight-to-one benefit over a 40-year work-life experience of saving.

But probably and more importantly [there is] the habit-forming nature of starting to save early. Most of us save best by paying our future selves first. In other words, we save before we spend. And then you don’t have to worry about the guilt of trying to save at the end of the month. Essentially you are saving at the beginning of the month via a debit order running off your account. 


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But the key issue here is the habit-forming nature of saving early. It just becomes ingrained. You get used to living on the balance of your income, and you know that retirement is essentially taken care of in that regard.

BOITUMELO NTSOKO: Could you also maybe explain to us the concept of the replacement ratio in retirement planning, and what significance it holds?

CRAIG TORR: It’s a nice guideline. So typically pension funds would calculate retirement on a replacement ratio of, let’s say, 70%.


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In essence, what that means is that if you save X amount, you would have an investment large enough to be able to draw 70% of your current take-home pay in your retirement years, which generally is an acceptable number because, if one contemplates that [from] your current salary you might be funding or paying for a bond, you might be raising kids – and that typically includes the contribution towards retirement as well. 

So 70% is generally regarded as a healthy [salary] replacement ratio for retirees.

BOITUMELO NTSOKO: Craig, earlier in the conversation we touched on the importance of starting your retirement savings journey earlier. Could you walk us through a case study that illustrates the difference between beginning contributions early versus delaying them?

CRAIG TORR: Yes, of course. I’ll work on that 70% replacement ratio, and we work on a life expectancy of a retirement term of 30 years, so from age 65 to age 95. I know that might seem a bit long for most, but we’d rather give ourselves the best chance of not running out of money. 

So if you were to want to meet that requirement as a 25-year-old, you’d be required to save about 15% of your salary. Should you just keep pace with inflation as your salary increases and you just did that for the rest of your life, you should have enough money to draw down 70% of your final salary for a period of 30 years. That would be the case if you started saving as a 25-year-old. 

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If you postpone the start date just by 10 years to age 35, you’ll need to almost double up on that. You’ll need to save about 27% of your income in order to achieve the same objectives. 

And if you delayed that start further, until age 45, you would find that you’d need to save just over 50% of your income in order to retire at the projected age. 

There are a couple of other ratios that might make sense from that point of view, if you think about it. If you start saving as a 25-year-old, you need to save only about one unit to ensure that you get five units at the back end. In other words, every R1 saved as a 25-year-old will enable you to draw R5 in real terms in your retirement, whereas if you postpone that start date to age 35, then your ratio is one to three, roughly. So that means every rand you save from age 35 would only have time to grow to enable you to draw R3 in that retirement scenario we sketched.

And then if you were to delay starting that retirement saving at 45, then your ratio changes to one to 1.5. So for every rand saved, you would only have R1.50 because you’ve got a very short period of time to get compounding on that. 

And if you leave it till age 70, then you’re literally on a one-to-one ratio.

So, in other words, if you start saving for your retirement at age 50, you will need to save one rand for every rand that you need to draw in retirement, simply because you’ve left it so late.

I know that’s quite a lot, but hopefully that some gives some useful guidelines.

BOITUMELO NTSOKO: It sure does. For listeners considering their options, what strategies can help them bridge their gap if they’ve started late or have inadequate savings?

CRAIG TORR: I think the big thing is to have a plan, but one that’s achievable.

What we find very often, the software that’s available, if you use it in a very bland way, it can be demotivating for the person who has left it late.

You need a plan that’s achievable so that it actually motivates the person to make changes and to start the process of saving for retirement and not feel overwhelmed by it. 

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At the end of the day, the toolkit – the financial planner can’t awake[n] [it]. There’s no silver bullet, there’s no magic wand that we can wave, but there are a number of factors that we can suggest that would improve the situation. 

The obvious one is delayed retirement, saving more leading up to retirement. And that obviously stems from the budgeting process, toning down your expectations in retirement – in other words, spending less.

And then the one that most people expect to be the silver bullet is to get a better investment return, and that you could do by investing a little more aggressively. 

Those are sort of the areas that one can look at in order to improve the situation for those people leaving it late, leaving the start late.

BOITUMELO NTSOKO: Thank you for joining us on this episode, Craig.

CRAIG TORR: It’s a great pleasure. Thank you for hosting.

BOITUMELO NTSOKO: That was Craig Torr, who is a certified financial planner at Crue Invest.

Listen to previous Money Rules podcasts here.

William Murphy

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