There are many tools you can use to save for retirement. Local savers favour employer pension funds, provident funds, retirement annuities and a wide range of discretionary saving alternatives.
Yet the South African retirement landscape is a ticking time bomb characterised by a reluctance to accept accountability for long-term financial wellbeing and exacerbated by the recent global financial turmoil.
A study conducted by Old Mutual concludes that only 12% of people born after 1980 are saving for retirement — with as few as 28% of these doing so through pension funds.Non-savers expect family or the government to pick up the tab for their old age.
Retirement products expose savers to a degree of stock market risk and it was not uncommon at the height of the 2008 stock market collapse for individuals to enter retirement with 40% less capital than expected.
‘The global economic turmoil left many investors feeling shell-shocked and uncertain; but savers must remain focused and disciplined in saving for their retirement,” says Johan de Lange, director at Allan Gray Unit Trust Management Limited.
What can you do to ensure a successful and independent retirement?
‘Starting early is extremely important,” says Craig Aitchison, managing director of Old Mutual Actuaries and Consultants, sharing the first golden rule.
Compound interest (interest on interest) works best over long periods of time. All else being equal someone who saves from age 35 will retire with only two-thirds of the benefit saved by a person starting 10 years earlier, at 25.
Saving for retirement is a long-term discipline that requires sacrifice. ‘Investors — especially when they’re young — would rather take their cash flow on their salary than contribute to a pension fund,” says Johann de Wet, head of Glacier Financial Solutions at Sanlam.
He offered this example to illustrate the magic of compounding: If you contribute to a retirement fund for 10 years (from age 20 to 30) and then stop contributing, you’re better off at retirement than someone who started saving at 35 and continued until age 55. All is not lost if you’ve missed the early start.
De Lange says: ‘A lot of people battle to meet savings commitments during the asset accumulation stage of their lives. Although it’s a tough ask, you can make up the shortfall in subsequent years when living expenses taper off.”
How much should you save? ‘Saving 15% of your gross salary over 40 years remains a ‘rule of thumb’ for an adequate retirement,” says Aitchison.
If you apply this rule throughout your working life you should be able to retire with a replacement ratio (retirement salary expressed as a percentage of your final salary) of between 80% and 90%.
De Lange agrees: ‘The primary retirement savings objective is to save as close to 15% of your gross salary as possible.” This saving is non-negotiable — and it helps to view it as money you haven’t earned.
De Lange believes you should ‘feather’ your retirement with additional discretionary savings too. Popular discretionary savings mechanisms include reducing debt (by paying extra into your bond) or direct investments into unit trusts.
The second golden rule to ensure a successful retirement is to preserve your capital whenever your employment circumstances change. You should resist the temptation to withdraw cash benefits from your retirement funding.
‘When you change jobs, don’t fall into the trap of using your retirement benefits to clear your Edgars account,” says Kenny Meiring, head broker: sales and marketing at Metropolitan Employee Benefits. You cannot afford to use retirement fund benefits to pay for extravagant holidays or new furniture.
Someone saving for 40 years at today’s average contribution rates and returns would retire with a replacement ratio 80%, provided they always preserve. If they change jobs three times and preserve only 50% of their capital each time, they will achieve a replacement ratio of just 30%.
On a similar note, Meiring warns against short-term thinking at retirement. The trend is for retirees to withdraw the biggest possible lump sum at retirement and purchase an annuity with the balance. This lump sum is wasted on new motor vehicles, gifts for children and other non-essentials when it should be applied to providing ongoing retirement income.
‘You tend not to think more than 10 years ahead, not realising that what you’ve got today is not necessarily enough going forward,” he says.
The third golden rule is to seek professional financial advice both leading up to and during retirement. ‘A common mistake is people don’t really take into account what their portfolio looks like as they near retirement age — you have to position more conservatively the closer to retirement.”
Aitchison believes there’s not enough focus on post-retirement financial planning. ‘There’s a lot of focus on the event of retirement and how much you should have — and there’s not enough emphasis on life afterwards,” he says.
You should ensure — with help from your financial adviser — that your retirement portfolio reflects your life stage at all times.
Zweli Moyo, head of institutional business at Nedgroup Investments, confirms the need for a firm grip on all aspects of retirement planning: ‘Most of us belong to what are known as ‘defined contribution’ pension funds, where you bear the risk of investment growth on your contributions. It is critical to keep track of, and to understand, the
state of your retirement.”