Triple Your Chances of Retirement Success

When embarking on the journey of investment, particularly with an eye towards a comfortable retirement, understanding the key variables that influence your outcome is crucial. Defining and quantifying a successful outcome is also important. In the pre-retirement phase, success might be defined by the growth of wealth and the highest probability of having enough for retirement. While post-retirement, it shifts to the highest probability of maintaining a desired lifestyle and not running out of money.

In this series of articles, we will illustrate how only a few tweaks to your savings plan will more than triple your chances of success, without needing to spend an extra cent. This will help you ensure that your golden years are just that - golden.

Make sure you focus on the things that you can control - and that matter

In both pre- and post-retirement there are five to six key variables that drive your chance of success. Some variables are within your control, while others you may have little to no control over. Furthermore, making changes to some variables can significantly improve your chances of success, while others may have very little impact. This series of articles will focus on helping you find the sweet spot – those variables that are within your control AND which can significantly improve your chances of success.

You can also think of these variables, illustrated below, as levers you can pull that will either move the ‘success dial’ – or not. Some of these levers are easy to pull and will move the dial materially. Others are difficult to pull, and even when you do, will hardly move the dial. Then some levers sit somewhere in between these two extremes.

To help guide you to this sweet spot, we used a powerful tool called The Big Picture which uses real data going back more than a 100 years and models the likelihood of success based on your inputs. The results also show that some decisions are not necessarily worth sacrificing for.

The pre-retirement journey to success

Our pre-retirement base case, let’s call her Mary, is 40 years old and planning on retiring in 20 years at age 60. She has already saved R 3 million towards retirement, which is currently invested in a multi-asset low equity portfolio as she is nervous about markets given the high levels of uncertainty, globally. Her total investment fees are 2.5% per annum and she is contributing 15% of her salary every year, which equates to R 12 500 per month. If she wants to replace the salary she is earning when she retires at age 60 by 60% in retirement, she needs to work towards an end goal of R 12 million (in today’s terms)1. It might seem overwhelming or even unattainable, but she still has at least 20 years left to benefit from the power of compounding. However, the likelihood of her current savings plan reaching her R 12 million goal, is 9%.

Fortunately, the variables that Mary can change have significant room for improvement. The graph below illustrates how a series of decisions can improve her likelihood of success.

Changing her asset allocation – by increasing her exposure to growth assets - and reducing her annual costs are the two levers that are both easy to pull AND moves the ‘success dial’ materially. Win-win! Increasing her retirement age by 3 years is another worthwhile change that takes her chance of success to a comfortable level. Thereafter, adjusting the starting capital committed to retirement savings and/or increasing her monthly contribution can be seen as marginal, but not necessary, changes or sacrifices.

The post-retirement journey to success

Post-retirement our base case, let’s call him Bongani, is retiring at 57 years old and assuming a life expectancy of 30 years. He has saved R 10 million towards retirement, which is currently invested in a multi-asset low equity portfolio as he shares Mary’s concerns. He pays 2.5% per year in investment fees and plans to draw 5.5% per annum, or R 45k per month pre-tax. He also wants to leave his twins an inheritance of R 1 million (in today’s terms) each. Bongani’s current likelihood of having enough money for retirement, and not running out, is only 11%.

Even though there are fewer variables to work with post-retirement, Bongani is also in a situation where he has room for change. The graph below illustrates how a series of decisions can improve his likelihood of success.

Again, changing his asset allocation – by increasing his exposure to growth assets - and reducing his annual costs are levers that are easy to pull with a material impact on his success dial. Reducing his drawdown rate might be harder to pull, but given the impact it can have it is certainly a variable worth working on.

So, what matters most?

The path to successful retirement requires impactful investment decisions and worthwhile sacrifices. The sweet spot, or variables to focus on first, are asset allocation and annual cost. This is good news for investors because it won’t cost them anything tangible. However, it will require discipline to stay invested when markets are down. Whether you’re growing your savings or preserving them post-retirement, mastering these aspects can significantly impact your financial comfort. In the next article, we delve into the nuances of at what age to focus on which variables in the pre-retirement journey.

1 As a rough rule of thumb, you can calculate your savings goal by multiplying your current annual salary by 20 and then by the replacement ratio you want to achieve. If you are currently earning R 10 000 per month and you want to earn R 7 000 per month (all measured in today’s terms) your replacement ratio will be 70%.