Investment and risk planning are inextricably linked. Most investment plans are designed to assist customers by either providing an income post-retirement, or to save towards a specific need or long-term plan. Risk benefits on the other hand, are intended to protect your ability to earn the income in the first place. So, in a very real sense, both are aimed at protecting your future income stream.
When it comes to financial planning, many South Africans are relying on outdated assumptions to inform their decisions. We’ve highlighted 3 myths informing these assumptions:
Myth 1: Consistent reliable income stream.
It’s often difficult to imagine ourselves as anything other than invincible, and many South Africans expect to work, without any interruptions, until the day they retire. This assumption arms them with a continuous and steadily increasing stream of income until then.
The unfortunate reality is that most income earners will experience significant volatility in their earnings during their working lifetime. Our claims stats indicate that 7 out of 10 people will have at least one injury or illness in their working lives that will prevent them from earning an income. What’s more, once they’ve claimed, they are 3 times more likely to claim again1.
So, what’s the solution? Protecting your ability to earn an income is the foundation for any investment plan. Not only is it imperative that you protect yourself from the immediate effects of not earning an income, but any break in income today would have an enormous impact on your ability to save for your future plans. Traditional life insurance benefits have been predominantly lump sum based, which ignores the fact that what you are really trying to protect is your income stream. This approach has a negative impact on investment planning for many reasons. Lump sum benefits typically only protect against permanent disabilities, and yet most injuries and illnesses are temporary. In addition, it’s far easier to calculate the cover you need when using a combination of income and lump sum benefits because the income is directly related to your current monthly earnings and the lump sum to the amount of cover you will need for once off expenses.
Myth 2: Retirement starts at 65.
The second assumption is that people think they are going to retire at 65 and die at 90, when in reality people are living longer, healthier lives and many see no reason to retire at the traditional age. A study by Nick Buettner found that working longer may actually be good for your health and longevity. “A person is 30% more likely to die in the year he or she retires than during their last year of work, not because they take up risky activities, but because they have lost their sense of purpose.” - Nick Buettner.
Many of us today are re-evaluating the traditional approach to work and retirement and may work past 65. Yet, despite this, much of the thinking around retirement planning is still based on the assumption of working until 65 and dying at 90. The fact that you will probably retire at 75 instead of 65 has major implications not only on your retirement planning, but also on the choices you make to protect your monthly income. It is critical that you choose risk cover that allows for the possibility of working past your expected retirement age.
Myth 3: Retirement fund that keeps on giving.
And lastly, people assume they will have enough to retire on. The reality is that many South Africans struggle to maintain their standard of living post retirement, which leads to the decision to choose to work longer and retire later, reduce monthly expense post retirement or save more for retirement.
There is this perception that income benefits are expensive, however income cover is more affordable with lower premiums than the lump sum equivalent. One way of saving more is by selecting more efficient life insurance and directing the premium saving towards an investment. A combination of income and lump sum benefits is the most effective and efficient way to protect your monthly income stream.
Bottom line: it’s never too late to adopt a more progressive approach toward financing your retirement. Opt for the right mix of life insurance benefits that shield you from dipping into precious rainy-day or retirement funds when unforeseen disruptions in income arise.
1 FMI 2018 Claims Stats