May 1, 2011

SOUTH AFRICA: Retire late, die early

CAPE TOWN / Independent on Line / Personal Finance / May 1, 2011

By Bruce Cameron

Now here is a conundrum for people who are planning when to retire.
Research in the United States has found that the longer you delay your retirement, the shorter your lifespan.

If you have a high-stress job, you could be knocking two years off your life for every additional year you work past the age of 55.

On the other hand, South African research shows that the earlier you retire, the less likely it is that you will be financially secure until the day you die.

So the choice is living until a ripe old age with very little money or living the high life for fewer years.

One possible solution that will ensure that you enjoy both a long life and a secure retirement is to save at least 20 percent of your income from the day you start working.

Research by American engineering academic Dr Sing Lin found that for every year you work after the age of 55, you forfeit two years of your life.

Lin says: “If you are not able to get out of the ‘pressure cooker’ ... at the age of 55 and have to keep on working very hard until the age of 65 or older before your retirement, you will probably die within 18 months of retirement.”

“By working very hard in the ‘pressure cooker’ for 10 more years beyond the age of 55, you give up at least 20 years of your lifespan on average.”

In a paper on the issue, Lin says that the pension funds of many large corporations – such as Boeing, Lockheed Martin, AT&T and Lucent Techno-logies – have been over-funded, because many people who retire after the age of 65 tend to die within two years of retiring. In other words, many late retirees do not live long enough to collect all their pension money, so they leave a lot of unused money in their funds.

The Boeing experience is that employees who retire at 65 receive pension cheques for only 18 months, on average, before they die. Similarly, the Lockheed experience is that employees who retire at 65 receive pension cheques for only 17 months, on average, prior to death.

Lin says that the hard-working late retirees probably put too much stress on their ageing bodies and minds and so develop various serious health problems that force them to quit and retire.

He says that the early retirees are not really idle. They continue to work on a part-time basis at a more leisurely pace, so they do not become too stressed. Furthermore, they have the luxury to pick and choose the types of part-time work that really interests them.

John Anderson, the head of national consulting strategy at retirement fund administrator Alexander Forbes, agrees with this last sentiment.

As with all things in life, Anderson says, balance is the key: you should strive to maintain a healthy balance between staying active and having sufficient leisure time.

He warns that you need to be very careful about rushing off to an early retirement.

Anderson says that you should base your retirement date on the amount of money you will receive as a pension on your first day of retirement compared with your final pay cheque – and that is only what is called your pensionable income and not any allowances. The difference between your pensionable income and your pension is known as your net replacement ratio (NRR).

Anderson says that from the age of 55 the effects of compounded returns become increasingly important. Working an extra 10 years, depending on when you started saving, can more than double your NRR.

It does not matter for most people what happens at Boeing. Statistics from the US and all over the developed world show that people are living longer and need more money to survive in retirement.

Much of the social unrest in Europe is because government-sponsored pension schemes are becoming unaffordable for the simple reason that people are living longer. More people on pension for a longer period of time supported by fewer people with jobs must eventually mean that people will have to work for longer or receive lower pensions.

And here in South Africa, the situation is much the same, despite the ravages of HIV/ Aids. If you reach retirement age, it is very likely that you will live longer than your parents.

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