Planning is as easy as having a beer

Since interviewing Alta Odendaal a few weeks back I have become intrigued by this subject of behavioural finance and how small tweaks to your behaviour can make significant changes to your financial well-being.

On Sunday I sat down with one of my good friends over a beer and we ended up having a long chat about retirement and where we would both end up based on our current habits.

For background information, my friend is 10 years older than me, a teacher, earns 45% of my basic salary, has never owned property, has no children and carries no debt. In contrast I earn more, have a kid in a special needs school, have an active share portfolio, carry debt and more years on him to retirement.

We plugged our respective savings numbers into the 10X retirement calculator and we tried to work out who would come out better off based on current habits. Interestingly I will come in at half of my retirement goal and he will come in nearly 30% higher than his monthly requirements. For the purposes of our breakfast, we assumed a 60% income replacement ratio.

The irony is that I come in at nearly 50% below my required replacement revenue, despite sticking to the industry ‘rule of thumb’ of saving 10% of my monthly salary. Well this is a problem …

More scary for me was when I started playing with the investment assumption side of the equation.

Market commentators and financial planners have been warning us for a while, that we are in for a period of sustained lower returns. Booming local equity and property markets which have driven retirement plans for the last 20 years in South Africa are unlikely to repeat themselves in the near-term. If my average investment return dropped by 3% over the period to retirement, I knock nearly R800 000 off this particular Retirement Annuity (RA).

On its own, none of the above is new or news.

What it highlighted for me is that if you have a financial plan – and it might just be ‘be comfortable for retirement’ – you need to sit down and interrogate your financial plan on a regular basis. A simple example, but sitting down for a beer on a Sunday afternoon, lead to me interrogating my retirement. Yeah yeah I probably need a life – but I realised that I hadn’t set my one Retirement Annuity (RA) to increase annually. That small omission cost  me R150 000 in the long run.