There are many risks to overcome to ensure your retirement savings last. These include longevity, inflation and investment risk. In light of these, there are four common retirement savings myths:
1. My retirement savings will outlive me
Many people will live longer than expected. Around 30% of South African women, retiring at 65, will still be alive at 90. Don’t think that your savings will last beyond your living years.
2. I only have to account for 6% inflation when planning for retirement
Although inflation has averaged 6% over the last 10 years, there have been times when inflation has spiked to 20%, as in the 1980s. R1000 in 30 years’ time will only buy you goods of R200 at an inflation rate of 6%.
Also, be cautious of some of the guaranteed annuity products on the market as many of them do not have inflation-related increases built into them.
3. I can draw down more than 4% of my capital annually
A starting point of 6% of capital may not initially seem a lot, but once you account for inflation, the minimum real (after inflation) return needed is 5.5% to sustain your income. Therefore, considering market fears and human vulnerabilities it would be prudent not to draw down more than 4% per annum.
4. I don’t need to take risk when planning for retirement
To sustain a regular inflation-related income, you must take risk. This will require a diversified portfolio with at least 50 to 60% invested in growth assets, such as shares. This may require you to stomach some volatility. But, if you are too conservative and have, say only 30% in equities, it is unlikely your retirement savings will last the distance.
