The South African savings industry fixates on a measure known as the “replacement ratio” when assessing the success or failure of a retirement savings plan. This ratio is the percentage of your pre-retirement salary you’ll “buy” with the capital you have saved during your working years.
If your final salary is R20 000 a month and you’re able to secure a R15 000 a month pension, then your ratio is 75%. And the experts reckon this number is what you should strive for.
If you follow the “15% for 35 years” rule, you should equal or better the 75% “pass” mark. Fall short and you’ll have to extend your career, make significant living standard sacrifices, rely on family for handouts or — as the cynics say — die younger. The frightening statistic is that as many as six in 100 retirement savers don’t meet this minimum.
There’s no safety net. You cannot rely on government to support you in old age. The current state old age grant is pegged at R1 080 a month and has loads of conditions attached. You have to be a South African citizen (or permanent resident) residing in the country, you cannot benefit from other social grants (such as a disability grant) and may not receive care from a state institution. To make matters worse, the grant falls away if you earn more than R31 296 a year, or if your assets exceed R518 400.
How do you avoid becoming a ward of state? South Africa’s retirement savings environment is dominated by the pension funds industry, thus your first step should be to join your employer’s pension fund as soon as you begin working.
David Gluckman, managing director of Sanlam Umbrella Solutions, says you must start saving as early as possible, preserve your pension ‘cash” when changing jobs and invest for the long term (20 years or more).
Henry van Deventer, head of financial planning coaching at Acsis, echoes the “start as early as possible” refrain. He illustrates with the following example. Let’s say you save R1 000 a month, increasing this amount each year to match inflation, and earn a modest 9% annual return.
Under these conditions, the person who begins saving at the age of 25 will have roughly double the capital of someone implementing the same strategy from the age of 35.
“Losing 10 years ‘costs’ you 40% in income,” says Jeanette Marais, director of distribution and client services at Allan Gray. Instead of retiring on R10 000 a month you would have to make do with just R6 000.
Your second step is to be aware that your pension fund might not be enough. “Increasingly, people are finding that it’s necessary to supplement their employer pensions or run the risk of not having enough money to retire comfortably,” says Marais. You have to make regular contributions to savings products outside your official pension plan.
Van Deventer says retirement annuities (RAs) are a valuable and tax-efficient option for additional investment. “Up to 15% of income that falls outside of your regular retirement-funding income is still tax-deductible, provided it is contributed towards an RA,” he says. If, for example, you receive an annual bonus of R20 000, then your tax-deductible RA contribution would be R3 500.
The easiest way for an individual to take advantage of this tax concession is through unit trust-based RAs. “These unit trusts are offered with low product fees, no penalties for surrender or discontinuation and fully transparent and negotiated adviser fees,” says Marais. You also have the freedom to choose the underlying asset classes in which you invest and you can usually switch between RA unit trusts without incurring additional costs.
Non-RA unit trusts are another popular destination for additional savings. “Most low- to mid-income workers will pay less tax on incomes and capital gains in such investments than they would by taking out an endowment policy,” says Van Deventer. The only drawback in this form of saving is the ease with which savers can make impulse withdrawals.
There are other steps you can take to get your financial affairs in order. Get a good feel for your incomes, expenses, outstanding loans and market-linked asset values with the help of a certified financial planner. “If you have debt (credit card, store cards, and so on) or even a housing bond, a sensible start would be first to reduce these balances, because the interest rates charged on debt exceed what one would earn in a separate investment,” says Gluckman.
Over the short term, you can consider the “low risk” RSA Retail Savings Bond which pays market-beating interest on two-, three- and five-year investments.
Don’t stress if you haven’t started saving early enough. “If it’s too late to start early, then put the brakes on your lifestyle,” says Van Deventer. You can make up a tremendous amount of lost ground by applying salary increases to savings rather than holidays, new cars or other luxuries. “Be disciplined about saving as much as you can at the beginning of the month, because saving what’s left at the end of the month never works.”