The Old Mutual Retirement Monitor 2010 provides valuable insight into the savings behaviour of full-time employed metropolitan dwellers.
One of its first observations is that retirement fund members are more confident than non-members in their ability to meet post-retirement financial commitments — likewise high-income earners over entry-level workers. Is this confidence misplaced?
There are two reasons for the misplaced confidence among members of retirement funds.
The first is the false security of having a team of professionals in their camp. They trust their financial advisers, fund administrators and fund trustees to look out for their interests.
Second, they believe belonging to a fund is enough to guarantee a comfortable retirement. Each of these assumptions has repeatedly proved incorrect.
But the most obvious gap between retirement savers’ expectations and the real world is the oft-quoted industry statistic that only six in every 100 retirement savers will be able to maintain their living standard upon retirement.
‘When I started in the industry 20 years ago the statistic stood at 6%,” says Johan de Lange, director at Allan Gray Unit Trust Management Limited. He says you get a better feel for the problem when socialising around a campfire and asking how many of those present are taking care of one or two of their parents.
Whether you prefer industry statistic or campfire speculation it’s clear that South African savers are overestimating their financial security. The gap between low and high income earners’ expectations is easier to explain.
Low earners feel less confident because their ability to save is impacted by having to meet immediate needs. In contrast, ‘highincome earners have more discretionary income and are more able to make decisions about putting away something for tomorrow”, says Craig Aitchison, managing director of Old Mutual Actuaries and Consultants.
Another major difference between high-income and low-income earners is their understanding of risk. High-income earners know how to use insurance to avoid being wiped out by an
unforeseen event, whereas low-income earners are still figuring that out.
The retirement savings process hinges on assumption. Retirement models require long-term estimates of inflation, rates of return on investment and life expectancy upon retirement. These assumptions introduce risk to the planning process.
De Lange says the first mistake is for clients to overestimate the rate of return they will earn on their retirement premium. ‘Second — they’re too aggressive in terms of what they take from their capital at retirement!” he says.
A third mistake is to underestimate the rate of price changes through retirement. ‘Headline inflation, as is quoted in the media, is based on an average basket of goods,” says Pieter Koekemoer, head of personal investments at Coronation Fund Managers.
For wealthy individuals to assume this rate in their retirement provisioning is risky. Their ‘basket” of goods is heavily weighted towards so-called administered prices, including healthcare, municipal rates, water and electricity, all of which increase at a rate far above headline inflation.
‘What this means is that a retired person in this grouping is more likely to experience inflation of up to 10% as opposed to the 6% average,” he says. To compound matters further, life expectancy is way ahead of where it was two or three decades ago.
Advances in healthcare technology mean individuals retiring at age 60 today can generally expect to live well into their 80s. Changes in life expectancy mean retirement is no longer a line drawn in the sand. You used to work until retirement and then stop.
Nowadays retirement is about changing the way you work. Instead of being formally employed for eight hours each day you continue working on your own terms, earning much-needed income to supplement your saving.
This trend requires both saver and financial planner to adapt their traditional investment thinking. Because you are living and working further into retirement than ever before, some form of post-retirement saving has become essential.
Retirement savers shouldn’t rely on product transparency, investment choice and regulation to make their lives easier. Although welcomed by many, choice in investment product portfolios adds to costs and increases the risk of emotion-based decisions.
Industry specialists question the sense of offering numerous portfolios at high cost when the bulk of
fund members opt for the default solution. Savers are conservative by nature and tend to favour low-equity solutions regardless of ‘time to retirement”.
There’s also a growing trend for sentimental savers to switch from high-equity to low-equity solutions at the most inappropriate time. Savers increase equity exposures when markets are buoyant — and reduce them when markets fall — effectively buying high and selling low.
‘When faced with the choice to elect how much of their gross to contribute to employer retirement funds, employees tend to reduce their contributions to levels lower than what they should be contributing,” says Johann de Wet, head of business solutions at Sanlam’s Glacier Financial Solutions.
He urges savers to establish how much of their monthly savings actually go to the retirement pot. ‘If you’re in employment a percentage of your retirement fund contribution will inevitably go towards life cover or income protection,” he says.
This reduces the contribution towards your savings — you might be thinking you’re contributing 15%
when in reality you’re in the 12% or 13% range.