The Retirement Trap For High-Net-Worth Individuals

Data published by the Reserve Bank in October 2020 shows that South Africans were spending more than 85% of their disposable income servicing debt in the second quarter of 2020.  “Add to this an insufficient savings rate and the trend towards longevity, and we’ve got a recipe for an economic and social disaster. More awareness needs to be created to understand the real value of capital required for wealth preservation, especially during retirement.”

The following is an excerpt from a FANEWS interview with James Garner, Chrome Wealth Associate from Finlink.


Under false pretense

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.

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.

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.

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.

The income gap

Sadly, many people who are income rich prior to retirement, end up being very poor in retirement and reliant on family and the state for their retirement. Those who were less fortunate, who struggled but were diligent in putting savings mechanisms in place, 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 for later in life.

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. 

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, that 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.

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.

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