If you save 12% of your salary every month for 40 years and invest in a balanced fund you will have enough money to retire comfortably. That amount would provide you with an income in retirement equal to around 70% of your final salary.
This is no rocket science and most formally employed people save around 12% or thereabouts each month, so why will only 6% of South Africans afford to retire?
There is one very simple reason — the lack of preservation. Figures compiled by Alexander Forbes show that 90% of people cash in their retirement fund when changing jobs.
For people below the age of 30 the figure is even higher and only about 6% of them preserve their funds when changing jobs — these are the 6% that will retire comfortably.
Considering that the average person will change jobs seven times during their working life and if they only preserve their retirement funds 10% of the time, the amount of income they will receive on retirement in relation to their final monthly salary will be just 16,3% – at this level one would struggle to survive let alone enjoy a comfortable retirement.
What is particularly depressing is that people are saving yet have nothing to show for it on retirement. If you work for an employer which offers a retirement fund you will be saving at least 10% of your salary. The savings are there, what we now need is the discipline not to cash it in.
This is an area that fund trustees should play an important role by informing members about the impact of fund withdrawal on their retirement plans. Currently most company pension funds offer cash withdrawal as the default option and if members do want to preserve their funds they have to obtain their own information. By making preservation the default, we could see a significant increase in levels of retirement savings.
Compulsory preservation is another area that government is considering although this is a highly politicised and sensitive topic. Calls have been made for compulsory preservation which would allow for emergency withdrawals, however this would be difficult to police – after all how does one define an emergency? A simpler solution would be for members, wanting to cash in when changing jobs, to only be allowed access to their portion of their retirement fund contributions whilst the employer’s contributions would be automatically preserved.
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