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How do you measure your financial health? By the amount you earn or the amount you save? Does your sense of financial wellness come from the car you drive and the house you live in or do you measure it by the amount of emergency savings you have and whether you are on track for your retirement? Do you sleep well at night because you have Egyptian cotton 1000 thread sheets or because you know your house is fully insured along with your life should the unexpected happen? The reality is that most people judge their finances by their income rather than their balance sheets.

Last week I gave a presentation at an Alexander Forbes Hot Topics seminar where the topic was “healthy finances”. After the event a few of the older attendees came and spoke to me about the changes they have noticed in their staff’s consumption-driven spending over the years.

One man told me that twenty years ago only the executives in the company drove luxury cars, and even then they were basic BMW’s. The rest of the car park was filled with basic models made by Toyota and Mazda.

Today, as an executive himself, he drives one of the least expensive cars in the parking lot which is now filled with Jaguar’s, Mercedes, BMW’s and Audi’s – not even the junior staff are driving Toyota’s anymore – unless it is a Land Cruiser!

He says his staff look only at their immediate cash flow. If they can buy a luxury car for R3000 a month they ignore the massive residual payment that will need to be met in seven years’ time and forget to calculate the real cost of that car over the period once they add in interest. Their pensions are underfunded, they have no savings plan for their children’s education and they have insufficient insurance and medical cover for their families. Yet they believe they can “afford” the car. If an MRI was done on these people’s finances it would show up a lot of unhealthy organs! These people are heading for a financial stroke or heart attack.

As part of the seminar, Alexander Forbes revealed some scary statics of what we really need to be saving in order to retire comfortably. Most retirement planning works on the assumption that if you save  15% of your salary from the age of 25, then you will have enough in retirement to provide you with an income equal to 75% of your final salary.

However Alexander Forbes’s research has shown that a 25 year-old needs to save nearly 20%  of their salary in order to achieve the 75% mark in retirement. This is due to a variety of factors. A young person today is facing the reality of a stock market that will not deliver the kind of returns we saw in the past where markets delivered anywhere from 15% to 20% a year. Most financial guru’s believe we will average returns of between 10% to 12% a year in a balanced fund. This means we will have to save more as the market will deliver less.

Secondly when they retire many people purchase an annuity to provide them with an income for life. These rates are based on two calculations – the current interest rates as well as how long you are expected to live. As interest rates have fallen so has the income from the annuity. We will need to have more money in order to buy the same income that current retirees enjoy. The average 25 year old is also expected to live much longer than current retirees which means the income has to last that much longer providing less on a monthly basis.

Another scary figure is the increasing cost of medical care. According to Alexander Forbes, a 40 year old couple will need R1.2 million (in today’s value) in retirement just to cover the cost of their comprehensive medical plan. So if you think for example that R5 million will be enough to retire on, twenty percent of that will go to just to your medical costs.

Ultimately younger people need to reconsider the amount they put away for retirement which will need to increase significantly in order to make up the shortfall in market returns. It is also very unlikely that a 40 year old today will be able to afford to retire at age 65, especially if they are expected to live into their 90’s. It also means that we need to refocus our attention on making sure our balance sheets are healthy rather than simply living from pay cheque to pay cheque.

 This article first appeared in City Press