Less than 10% of South Africans can retire comfortably. That’s an uncomfortable fact, and one that explains the emergence of the term ‘sandwich generation’: a whole generation of people who are having to support both their children and their parents, often under the same roof.

This lack of preparation for retirement is generally caused by people not investing enough during their working life, or even dipping into their retirement investment on leaving a prior job – both of which stifle the ability of compound growth to work its magic.

Do you know if your parents are prepared for a comfortable retirement? If not, not only will you be left worrying about them, but you might become part of the sandwich generation needing to support them. If you are going to be one of those people, then it’s best you get to know as early as possible so that you can budget accordingly. So let’s chat about how you can approach this conversation.

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Make sure you’re sorted first. Before you assess your parent’s retirement, make sure you’ve done a good assessment of yours. Because the earlier you start investing towards your later years, the more compound growth can help you make those years comfortable. Read our blog post about planning for retirement.

How to approach the retirement chat with your parents

Money matters may not be the easiest thing to talk about with your parents, but in the long run it’s a good idea for both of you.

First things first: how are they faring in preparing for their retirement?

Whether they’re edging towards retirement or they’re already there, download our retirement calculator to determine how on track your parents are (as individuals).

If they are well set and even have a surplus, this is the best case scenario and if so, you can say you were just looking out for their wellbeing (cue child of the year nominee!).

Determine what group they fall into

If your folks are a bit behind where they should be (or not entirely sure what to do), maybe you can give them a bit of help.

How you approach this depends on which of the three possible groups they fall into:

  1. Your parents are more than 10 years from retirement
  2. Your parents are close to retirement
  3. Your parents are already retired

Skip to the section that applies to you and your parents:

📌 Read this if… your parents are more than 10 years from retirement

1. Thoroughly interrogate their budget

Do your parents know where their money is going? Are there any expenses that can easily be cut? Any unused subscriptions that are never used?

The less they spend, the more they have to put away or repay expensive debt. As they’re still working, encourage them to budget their household expenses and save a bit more every month, whether that be into their retirement investments or discretionary investments.

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Help your parents start investing. You can help your parents set up a Franc account – even if they’re not very tech savvy – by creating a Linked Account for them. You essentially create a Franc profile and account in their name, and give them a head start by setting their investment goal and getting a recommended investment strategy for them. You can also easily deposit into that account if you want to help support them.

2. Chat about their retirement age

This may seem like a strange one, as many people are expected to look forward to their retirement. After 40 odd years, who can blame anyone for wanting to have a break?

However, there are also many people who want to keep working because they enjoy what they do. Continuing their work has multiple benefits: the mind and body is kept busy. Work also often gives people – especially in older age when children are all grown up – purpose in life.

Whether they continue working at the same company (if there isn’t a mandatory retirement age), continue working as a consultant or take up a part-time role when they leave, assess whether they’re open to continuing work and earning so their retirement investments have longer to grow.

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Let’s put this into an example: Compare Person A who retires at 60 (and passes at 80) to Person B who retires at 63 (and passes at 80), and assume they earn the same and have the same amount invested. Person A would have had to live on their retirement savings for 20 years, while Person B would only have had to rely on their retirement savings for 17 years. Besides that, Person B’s retirement savings will have been much more than Person A’s as they would have contributed to it for 3 years longer and benefited from 3 more years’ growth. This could mean the difference between a comfortable retirement and one on a shoestring.

3. Have a look at how their money is invested

If they are more than 10 years from retirement, then their investments are able to ride out shorter term fluctuations (known as volatility).

That means a big proportion of their invested money should be in shares or equities (on the stock market), which will give them the best chance of maximising their investment value. Shares have historically shown the best returns over a long period of time.

If they are invested in a pension fund or retirement annuity, these funds have to comply with certain restrictions (such as a maximum of 75% invested in equities). If they are investing in discretionary investments (like through Franc) or tax-free savings accounts, this restriction does not apply.

Bottom line: having the majority of your money stuck in a bank account or fixed deposit at this stage of your life is a big no-no!

📌 Read this if… your parents are close to retirement

1. Thoroughly interrogate their budget

Do your parents know where their money is going? Are there any expenses that can easily be cut? Any unused subscriptions that are never used?

The less they spend, the more they have to put away or repay expensive debt. As they’re still working, encourage them to budget their household expenses and save a bit more every month, whether that be into their retirement investments or discretionary investments.

💡
Help your parents start investing. You can help your parents set up a Franc account – even if they’re not very tech savvy – by creating a Linked Account for them. You essentially create a Franc profile and account in their name, and give them a head start by setting their investment goal and getting a recommended investment strategy for them. You can also easily deposit into that account if you want to help support them.

2. Chat about their retirement age

This may seem like a strange one, as many people are expected to look forward to their retirement. After 40 odd years, who can blame anyone for wanting to have a break?

However, there are also many people who want to keep working because they enjoy what they do. Continuing their work has multiple benefits: the mind and body is kept busy. Work also often gives people – especially in older age when children are all grown up – purpose in life.

Whether they continue working at the same company (if there isn’t a mandatory retirement age), continue working as a consultant or take up a part-time role when they leave, assess whether they’re open to continuing work and earning so their retirement investments have longer to grow.

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Let’s put this into an example: Compare Person A who retires at 60 (and passes at 80) to Person B who retires at 63 (and passes at 80), and assume they earn the same and have the same amount invested. Person A would have had to live on their retirement savings for 20 years, while Person B would only have had to rely on their retirement savings for 17 years. Besides that, Person B’s retirement savings will have been much more than Person A’s as they would have contributed to it for 3 years longer and benefited from 3 more years’ growth. This could mean the difference between a comfortable retirement and one on a shoestring.

3. Have a look at how their money is invested

As you get closer to retirement, there are two approaches to investing:

  1. Get conservative: Do you want to protect what you already have and start investing in less risky investments, like cash? That means that if the market crashes just before you retire, the impact on your investment is limited.
  2. Take on some risk for potential greater return: The other option is to remain (or start being) heavily invested in investments that carry short term risk but have the best long term potential, like equity.

Given your money will potentially be invested for another 20-30 years after you retire (so you can ride out many ups and downs), I would personally go for the second option. Unless the intention is to buy an annuity (or pension) with your retirement investment as opposed to living off it via a living annuity. See Living annuity or pension? below.

📌 Read this if… your parents are already retired

1. Thoroughly interrogate their budget

Do your parents know where their money is going? Are there any expenses that can easily be cut? Any unused subscriptions that are never used?

The less they spend, the more they have to put away or repay expensive debt. Encourage them to budget their household expenses and save a bit more every month.

2. How is their money invested?

Once your parents are retired and have the ability to access their retirement investments, assess whether they are able to take a portion in cash. If so, how much and what are the tax consequences?

If they can take a portion of cash without any tax consequences, encourage them to get as much as they can and help them reinvest as much of that as possible in discretionary investments – don’t let them just spend it!

With the balance they will need to buy a pension or invest in a living annuity - read below for more information.

Living annuity or pension?

This is maybe best compared using an example. Let’s say you have R2 million after taking out a cash portion from your retirement investments:

Investing in a living annuity

If you use this to invest into a living annuity, you will have to live off this R2 million plus any investment growth. Per the regulations, the amount one can draw from a living annuity a year is 2.5%-17.5%. So if you have R2 million, this means you can draw between R50,000 and R350,000 a year (paid to you monthly, quarterly, biannually or annually).

Let’s say you decide to draw down R200,000 a year from your R2 million (10% a year). If you assume no investment growth over the period (an unlikely scenario, but it just makes the example easier), your R2 million will only last you 10 years (R2 million divided by R200,000). Once it is finished, then you will have to find alternative ways to earn an income or rely on others to survive.

If you pass away and there are still funds left in your living annuity, these will be transferred to your beneficiary.

Buying an annuity (pension)

The other thing you can do with your retirement investment is buy an annuity, or pension, which guarantees a specific monthly payment from an insurance company.  

One benefit of buying an annuity is that your parent is guaranteed to receive a payment for as long as they live. When they pass, their spouse could get a portion of what they were getting before death (depending on the terms of the annuity). But when the spouse dies, the payments stop.

If your parent is single or you think their spouse will be comfortable enough if they pass away, they can also choose the option for the payments just to come to them, which will increase the monthly amount they receive.

There are two options when it comes to the monthly payment:

  • Opt for it staying flat over the whole period: you get a much better initial payment but then it doesn't increase.
  • Opt for it increasing with inflation every year: you start off much lower but benefit from an increasing amount every year.

If you use the assumptions from the University of Cape Town you can see that a married 60-year old male with R2 million will get R20,600 a month if they choose the option where the amount remains the same (so even when they are 80 they still get R20,600 a month).

If they choose the amount that increases with inflation every month, they only start off with R10,700 a month.

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Women generally live longer than men, so they will get less per month from an annuity if they have the same starting investment. The insurance company has worked out that they are probably going to have to pay for a longer period of time.

Talking to your parents about money and retirement might not be easy, but it helps both of you to be prepared. So sit them down with a cup of coffee and use this as a guide to help you out!