“But, Lisa, retirement is so far away…”, or “I’ll start saving when I earn a lot of money”, or “once the kids are out of the house, I’ll start preparing for retirement”. I hear this a lot!
According to our National Treasury, only 6% of our population will be able to afford to retire and maintain their quality of life at the same level as before retirement. That mean 94% of us will need to downgrade our lives to survive. That is a shocking statistic! And I don’t think we fully understand the gravity of this situation.
We work for forty years to support ourselves for a further forty years. So it’s simple math to calculate that we should be saving at least half of our salary to fund our future! In today’s money, you need at least R 3 million to retire on R 10 000 per month. Gulp!
So, I present you with a lifetime opportunity to solve this problem and live your best life yet.
- Only 6% of the population will be able to retire with enough money.
- Will you live as part of the 94%?
- Our corporate retirement framework is structured differently from previous generations.
- Defined benefit fund – proportionate of final salary paid on long-term service.
- Companies consumed the risk benefit of each employee. This would include managing:
- Longevity risk – the longevity of an employee
- Investment risk – the growth of funds to withstand bad economic times
- Inflation risk – the money would outperform inflation
- Behaviour risk – the prevention of frivolous overspending
- When people started living longer, companies could no longer afford to structure their funds as such.
- Define contribution funds – what you contribute to your retirement is what you get in return.
- It takes a long time for these funds to build momentum with compound interest.
- People that are coming into retirement now have no precedent set for them.
- We work for forty years to live for a further forty years.
- Money is finite. You will rob from your future self if you spend your money now.
- Money takes time to grow – every cent put away TODAY is valued more than a cent at retirement.
- HOW do we change the current situation and save for our future life?
- Save more and spend less paradigm.
- Build an additional income stream to compliment current expenses and contribute meaningfully to your retirement.
- Sign up for my 16-week side hustle challenge!
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Lisa Linfield: 00:09 Hello everybody, and welcome to today’s episode of Working Women’s Wealth. According to National Treasury, only 6% of people will be able to retire at the same standard of living as they did before they’re retired. That means 94% of us won’t.
So the question is, of your hundred closest friends and work colleagues, will you be one of those six? Or will you sit on the side of the 94, unable to live your best life because you don’t have enough money? This situation is different from previous times, and the reason is that since the baby boomers, people who are coming into retirement now, the way retirement has been funded has changed.
You see, in the very old days, most people that were employed were on what’s called a final salary scheme, or to use the industry name, a defined benefit fund. This means that when they retired, they were able to get a proportion of their final salary paid to them. The calculation of how much that was included a factor of how many years you had worked for your company. It’s one of the biggest reasons why people used to stay at a company for life. That way, you secured the maximum amount of pension that you could.
In effect, what happened is that the company assumed the risk of your retirement, and there are four major risks that they assumed. The first one is longevity risk, how long you will live. The fact that you may live to a hundred, they would then need to pay you for 40 years from their fund. The second risk is investment risk. The fact that in order to meet the monthly amount that you need, the money had to be invested to grow enough, and also to be invested such that when the market didn’t do well for the many years that it didn’t do its great performance, that that growth would take care of those bad years.
The third risk is inflation risk. Ensuring that your money grew to keep up with inflation, because the cost of bread today will nowhere near be the cost of bread in 40 years time. The last risk is behavioral risk, and this is the biggest risk of all. That that monthly check prevented you from getting this big lump sum of money that you then spent in the first 10 years. There are a few companies, and many government agencies, that do still use defined benefit funds. But when people started living longer, companies worked out that they can’t in fact afford to fund people’s retirement for the long period that we’re now living, and the concept of what’s called defined contribution funds crept in.
Essentially, that is when what you contribute is what you get out, plus any growth in your investment over time. Contribute lots, and you’ll get lots out when you retire. Contribute little, and you will get little. The challenge is that because it takes so long for the effect of these changes to be seen, as this first generation starts retiring, they have no experiences to draw down.
Their parents retired with the company taking responsibility of them, and they couldn’t teach them how this period should work. So as they retire, they retire with what they think is a lot of money. They don’t seek financial advice, and they look at this pot and go, “Woo-hoo, we get to be the coolest grandparents out.” They fund family trips, spoil the kids and grandkids, but then wake up 10 to 15 years later at 75 to 80 and are running out of money, and their kids then have to support them.
I always say that if you’re 55 years or younger and married, you should expect to support at least one parent sometime in your life. The reality is they don’t have enough to start with, enough to last a 40 year plus retirement. And with people living longer, we are essentially working for 40 years to fund 40 years. So without investment growth, you should theoretically only live off half your income in order to save half for the future.
When you put investment growth in that, that’s why you only should be saving around 20%. You need 3 million rand to fund 10,000 rand of monthly expenses, or 300,000 dollars fund 1,000 dollars of monthly expenses. For most people that just covers medical insurance for two, and maybe your household rates and taxes, if you’re lucky. No food, no transport, nothing.
So if 94% of us are going to struggle to retire before we’ve needed to support our parents, then how do we change our future lives? Step one is to realize that money over your lifetime is finite. You get to either spend it now and you won’t have it later on, or save it now and you will have it later. It’s your choice, and it’s truly as simple as that. You spend now and you rob your future self of a good retirement.
If you choose to spend it now, even like most people I know, just to spend every cent trying to give your kids the best life possible, then know that the choice you may be making is to give them the best life now in exchange for them having the burden of supporting you later. Again, it is literally as simple as that. So the quicker you get your kids financially independent, the better.
Step two is to understand that money takes time to grow, and that time is either your friend or your foe. Every cent put away today is worth more than a cent put away when you’re close to retirement. Why? Because you have the time for it to grow, to earn compound interest, which is free money on free money. Many people tell me they’ll save for retirement once their kids get older and their expenses slow down. The challenge is, because we’re having kids later in life, that’s usually in our late fifties when there’s not enough money to retire. Time is either your friend or foe.
Step three is to start building an additional income stream. The reason why I encourage this is that for most people that I speak to, every cent they earn is going to pay for medical, food, transport, and kids. They truly are not wasting this huge amount of extra cash. Yes there are exceptions, but most people I speak to are just trying to get by on what they have. I’m passionate that each one of us needs an extra source of income and should start a side hustle.
It takes time to build it up to meaningfully contribute to your income, but if you start now, by the time your company forces you to retire you will have a way to make the money you need in retirement. And along the way, if you save that extra income and not spend it, you will create a meaningful contribution to your retirement.
Remember that the longer it is before you need to draw on that savings or investments, the longer you use the time to make it grow. So if you’re forced to retire by your company at 65, and your side hustle can fund you until you’re 75, then you need less savings. I’m truly passionate about supporting people to have enough money to retire, because each day I work with clients who don’t have enough money, who are in retirement already and have to drastically cut their lifestyle because they’ve just realized they’re running out of money.
Or who need to have that awful conversation with their kids, that they now need to support them. And trust me when I say those kids actually can’t afford to support them. This week I kick off two weeks of free webinars that look at the four most common reasons people tell me that they can’t do a side hustle, and why I don’t think those reasons are as valid as they used to be in the old days.
We look at why you don’t need a perfect idea to start a business, why you don’t need to be a techie to have a website or be a social media guru, how you can create clients outside your friends and family, and why it’s easier now than ever to learn how to start your own side hustle and leverage the people around the world to do the work for you.
If you want to join our webinar and learn more about starting your own business, you can sign up on the website. It’ll be an hour of free live video conference teaching, where you get to ask me the questions you have. On the 25th of September, my 16 week side hustle course opens. It launches only twice a year, and the next time round will be in March, 2020. So don’t miss out, because I have some fantastic deals that are available now in celebration of my 100th episode of this podcast. So go to WorkingWomensWealth.com to sign up for the course. I’m Lisa Linfield, and this is Working Women’s Wealth. Have a great week.