What to do when your retirement target seems impossible to achieve

So, you have had your first retirement planning session, or have finally considered it time to start a retirement plan. However, you have just realised (or worse, been told) that your lifestyle at retirement is going to need to change drastically, as your current way of living is not sustainable in retirement, given the time you have until then, and the amount of money still needed to be saved.

Hit by such a bombshell, what should you do? Do you throw in the towel and accept things as they are (and join the statistics of people who can’t afford to retire comfortably)? Do you ignore the facts and live in denial, telling yourself everything will work out in the end without the need to make any changes? Or do you admit that somewhere down the line you will need to make some changes to your lifestyle? If so, is it not better to start making those changes earlier (if not immediately) than to leave them for later? Assuming that leaving things for later has got you to where you are today, it is probably wisest to start making those changes right now.

However, making that decision still leaves you with the how? The good news is that there are some simple tools and practical ways of improving your retirement outcome, if you are willing to commit to making and following through with certain changes to your current lifestyle. Before discussing these tools, here are five pointers[1] to bear in mind, which may already be familiar to you:

  1. There is a big difference between standard of living and quality of life: you will always be happier with an improved quality of life, but not necessarily happier with an improved standard of living. Whereas standard of living can always be improved using debt, quality of life can only be improved with discipline. In general, we like debt more than we like discipline (as debt gives us access to immediate gratification, but discipline requires time and effort). However, debt is also more likely to result in financial pressure in the future, whereas discipline will always result in financial freedom. If you have ever had a credit card bill or credit at any clothing store, you will know this is true – you struggle to meet the monthly instalments on things that have not actually improved your quality of life, and have not really made you happier.
  2. Although all of us are currently living off a percentage of our income, many are not aware of what that percentage is. In general, most people live from pay cheque to pay cheque, thinking if there is money in the bank, then it is there to be spent.
  3. The common thinking is that if you had a little bit more money, you would be fine and life would be a little bit easier. But the truth is that if your spending tracks your income (i.e. you spend more when you earn more), then you will always feel this way, no matter how much you earn. If you don’t believe this, just look at any millionaire who files for bankruptcy or is feeling the financial pressure because they can’t meet their spending habits!
  4. For those who are already earning a considerable income: if you are honest with yourself, you felt similar financial pressure to what you do now, even when you earned much less. However, in hindsight, life seemed simpler, and if you knew then how much you would be earning now, you would be shocked to know you would still be experiencing financial stress.
  5. Living within financial margins (i.e. your spending is lower, sometimes much lower, than your income) means much less stress from financial pressure, and much more peace (something everyone would prefer).

The first step in improving quality of life and moving towards financial freedom, is to know where all of your money is going. You need to begin by keeping a ledger system (either in a booklet or on a computer, using software such as Excel) and determining what you are actually spending your income on. By taking this first step and diligently documenting your spending, it will be much easier for you to identify your needs and your wants (things you spend money on because you think you can afford them; in fact, many of you may be surprised at the amount of money you are spending on luxury items, some of which you honestly cannot afford).

The second step is to set a financial margin goal (i.e. to determine the percentage of your income you are not going to spend – other than in an emergency) and stick to it. We call this financial margin breathing room, as you will find that it is always easier to breathe when life throws a curve ball at you and you know you have a financial margin to cushion the blow. Here the goal should not be to see how much income you can spend so that your margin is the smallest it can be – this way of thinking is very outdated. Rather look at how big you can make your breathing room, so that you will face less and less financial pressure in the future. Don’t again fall into the trap of allowing your spending to track your income.

By combining these two steps, it will be easier for you to estimate the regular expenses or needs you would face at retirement (knowing which of your current expenses you will likely incur at retirement and which will fall away), and therefore establish a more attainable goal based on the time you have left before you retire. If you are fortunate enough to be in a position where your new financial goal is very much attainable (i.e. it seems as if you can actually save a bit more), then you can start adding to your retirement expense budget those luxury items you have been so accustomed to (and maybe even throw in an overseas trip now and then!).

After you have established your retirement expense budget (estimating which of your current expenses you will have in retirement), there is an optional additional step you can take, which could further improve your chances of attaining a better quality of life in retirement. This is to seek financial advice (which you may have already done, as you are aware that your standard of living in retirement needs to change). Although financial advice can be costly, there can be great benefits to obtaining, at the very least, a one-off assessment of your financial circumstances. An expert may be able to highlight certain financial needs you may not have thought of, or certain methods of saving money you have not yet considered.

[1] Adapted from an audio podcast by communicator and pastor Andy Stanley.

Pensions World SA
April/June 2018 Vol 21 No 2

By Ryan Campbell-Harris, Associate Actuary