"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman." Ronald Reagan.

Perhaps we in South Africa can relate more to this than the Americans could when Ronald Reagan said these words.

There is an old financial planning joke. A retiree sits opposite his adviser holding up a five rand coin. The retiree says; “Here’s Five Rand… all I’ve managed to save for retirement go ahead and make a name for yourself”. There is of course some sadness in this joke because many people do fail to set aside sufficient funds for retirement. Apart from the simple fact of struggling to make ends meet, these retirees also tend to be forced to take too much market volatility into their portfolio in an effort to allow market performance to literally trade them into a comfortable retirement. These retirees also sadly, become willing targets for the sellers of get rich schemes including support for Ponzi schemes.

There is a simple relationship between the funds available to you in retirement and the amount of money you have to spend on your lifestyle. So for example in the event that you have saved R10 million for your retirement and your lifestyle spend is R 1 million per year (R83,000 per month). Your capital will last about 20 years after retirement. However, here is the catch. To ensure that your capital will last 20 years your portfolio needs to have generated a return which exceeds inflation by 8% per annum. In turn, a portfolio which is constructed to achieve this result will be volatile to the extent that in any one year the return could fluctuate between minus 12% and plus 40%! This is not the type of portfolio that any planner would want to recommend to a client who is about to retire! If the client is to benefit from lower volatility he would have to accept that his capital would be exhausted within 10 years of retirement.

So a client that requires to fund a lifestyle of R 1000,000 per annum would need to accumulate about R20,000,000 and his funds would then last for twenty years. This portfolio will fluctuate between 0% and 16% in any one year thus delivering the required lifestyle funding and the type of volatility that such an investor would feel comfortable with.

So the bottom line is that in the run up to retirement one should not underestimate the amount of capital that needs to be set aside and therefore the time that is needed to deliver that capital. Give yourself plenty of time and money to secure a fulfilled retirement. 

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