Why retirement is not easy for the rich

In the coming decade, the number of ultra-rich South Africans in the country is expected to increase by about 40%. Yet the percentage of this group that will maintain their lifestyles into retirement is significantly smaller, this is according to Jason Garner, Strategic Relationship Manager for Private Wealth Management, a division of Old Mutual Wealth.

According to the Savings Institute of South Africa, the South African retirement market is facing serious challenges as South African saving trends decline to their lowest levels since 1991.

What is as concerning, according to Garner, is the fact that the country’s debt to income ratio is also near 80% and at an all-time high. This means that people are spending nearly 80% of their disposable income servicing debt, which is one of the issues that need to be resolved. An insufficient savings rate, coupled with high debt and the trend towards longevity, is a recipe for an economic and social disaster. These patterns need to be reversed.

Under false pretense

According to Garner, while the growth in the number of high and ultra-high-net worth figures are encouraging and good news for the country, it also raises the issue of more awareness needing to be created to understand the real value of capital required for wealth preservation, especially during retirement.

“Many high-net worth individuals incorrectly think that they have more than sufficient funds for retirement due to their current status, but often this may not be sustainable for the particular lifestyle that the individual has become accustomed to,” he said.

According to the2014 Old Mutual Wealth Report on Attitudes Survey, more than a third of the financial planners surveyed expected their super wealthyclients to spend more on luxury goods this year, with 46% of ultra-rich African clients mentioning they would increase their spending activities.

“These individuals need to ensure that they have the funds available if they want to maintain this lifestyle well into retirement, which is likely to include overseas travel and the purchasing of luxury items and experiences. Similar to the average income individual who does not have a savings goal, a comfortable retirement is unlikely even for the wealthy, when they do not have a long-term wealth preservation strategy,” he said.

“In this market there is the perception that with R30 million in savings, they can continue to live the lifestyle to which they have become accustomed to. The biggest mistake is that many do not understand the long-term consequences of sustainability of their chosen lifestyle at retirement. One must look at the demands that all the lifestyle requirements, including unforeseen costs, will have on the wealth management strategy holistically,” said Garner.

“Retirees also need to remember that their day now includes an extra eight to 10 ‘free’ hours that were previously spent at work, and it is likely that this time will be spent doing more expensive activities that need to be budgeted for,” continued Garner.

The income gap

“Sadly, many income rich people, prior to retirement end up being very poor in retirement and reliant on family and the state for their retirement. When looking at the savings of those less fortunate, who struggled but were diligent in putting savings mechanisms in place, they are able to enjoy a retirement without becoming a burden to anyone. This trend highlights the fact that whatever a person’s financial status, rich or poor, having good financial discipline is the difference between success and failure in securing finances later in life,” said Garner.

“These challenges in effective savings is, and will continue to be the cause of the increasing retirement gap between the poor and that of the middle and upper classes,” continued Garner. 

Encouraging smarter thinking

“Changing the culture, mind-set and educating people about the risks of not saving versus those of saving takes time and energy and may not be easy. However, if we get this right, the direct impact on savings levels means by implication the financial services industry will benefit directly through increased investments by more people and in essence that more people will be able to sustainably live long prosperous financial lives,” continued Garner.

“Financial Planners need to figure out more effective means of engaging with clients who need to save but have turned their back on savings,” said Garner.

Garner explained that upon retiring with a significant amount of money, there are two potential pools that this money should be divided into, namely wealth preservation assets and surplus assets.

“Wealth preservation assets refer to the capital that is needed to sustain the level of wealth or lifestyle for the duration of retirement. Once this figure has been determined, the amount of surplus capital available is known. Surplus assets refer to the money that can be used when making emotional financial decisions or to speculate with, such as buying into a new business venture that may or may not be profitable,” he said.

Editor’s Thoughts

As Garner mentioned, the rich are getting richer, the poor are getting poorer before retirement which in turn is causing the same result and trends in retirement. This is where advisers play a key role in the education and shift in culture required to start saving.

14 January 2016
Myra Knoesen