JOHANNESBURG – South Africans who are concerned that they may have to support their retired parents financially while also providing for their children need to reduce their spending and increase their savings.

Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (Asisa), says while retirement seems far away during your 20s and 30s, people who start saving at the age of 20 typically only have 480 pay cheques to make provision for retirement.

For those who start saving for retirement at 40, it reduces to 240 pay cheques.

But how much is enough to retire?

Dempsey says a general rule of thumb suggests that you need between nine and 12 times your annual earnings (in the year prior to retirement) in capital to ensure that you do not outlive your money.

However, people often incorrectly assume that their family home will become a big part of their retirement funding.

Dempsey says this assumption is flawed, because even if pensioners sell their house, they will have to live somewhere.

He says while your primary home is part of your net capital it is a fallacy to believe that it could be your retirement provision on its own.

It is also important to consider that medical expenses typically escalate, as you get older.

Dempsey says in the US, the Federal Reserve determined that the amount of money people spent on healthcare from the age of 65 till death was about three times the amount spent on healthcare up to the age of 65.

The sandwich generation

Even for those who do carefully save for retirement, unexpectedly having to support retired parents (while still supporting children) can fundamentally change their own financial prospects in retirement.

This is often referred to as the “sandwich generation”.

“Unfortunately most people don’t plan for this eventuality and are left ill prepared when it suddenly becomes their reality. Having to take on the financial burden of an aging parent is likely to jeopardise your own retirement planning. As a result you may very well end up having to rely on your children for financial support during your retirement,” he says.

But what are the solutions?

Dempsey says for a lot of families there aren’t many options.

Those who need to support their parents and their children financially and who are already in their late 40s, could be under strain unless they receive a windfall.

South Africans who have identified the situation as a potential risk to their future financial independence should take action early.

Dempsey says they should acknowledge this situation as another savings goal apart from their own retirement, the education of their children and their other savings goals.

“I think it’s very important that we should all ensure that as individuals we can retire financially independent,” he says.

South Africans should also acknowledge that they might need to live off their retirement funds much longer than was the case some time ago.

Sound investment principles

Dempsey says it is important to consider getting the help of a good financial advisor that can help you set up a plan.

Part of this financial plan could include making additional provision for your parents.

While it is very difficult to time the market, it is not that difficult to stay in the market and to follow a diversified approach to your investment portfolio.

It is also important not to get distracted by unnecessary purchases that could include a new car.

He also warns against the seduction of “wonderful” return promises.

Dempsey says if the market is collectively offering a return of 12% on an investment, there are only two reasons why someone else could be paying 20% – either the investor is taking on higher risk, or the company does not plan on giving the money back.

Ultimately, there is no replacement for starting to save early. Compound interest adds up.

Dempsey says if Investor A starts saving R500 a month at age 18 at an annual interest rate of 9% the person will have contributed around R220 000 by the time she is 55. By then, the investment will have grown to R1.689 million.

Investor B who started saving R1 500 a month at the age of 30 at an annual interest rate of 9% will have contributed R450 000 by the time she is 55, but the investment will only have grown to R1.662 million, he notes.

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