Ask a stakeholder in the retirement provisioning space how much you should contribute to your retirement fund and they’ll probably say 15%. The same individuals say you should save 15% of your gross salary for at least 25 years (35 years would be better) in order to build up enough capital to “buy” a comfortable income through retirement. Although everyone’s “comfortable” is slightly different, there is consensus that 75% of your pre-retirement income is a sensible income target for the first of your so-called golden years.
Is 15% a sensible target? There is a huge disparity between theoretical retirement savings models and real-world experience. Many pension fund solutions — as evidenced by the Benchmark Survey – are designed with lower contribution levels. Why? “Certain funds take the view that they don’t need to provide 100% of their employees’ retirement savings, leaving it to employees to augment their fund values with their own private savings,” says Andrew Davison, acsis head of Institutional Asset Consulting.
Even so, Frank Richards, head of Asset Consulting at Momentum Employee Benefits, says your retirement “success” is a function of the nett monthly amount you save (nett contribution), the growth of the invested assets per annum (investment return) and the time period for which you invest.
The 15% nett contribution bandied about by investment analysts and media is the contribution required to generate a 75% replacement ratio assuming 6% real return over 25 years, or 3.5% real return over 35 years.
It is possible to achieve a “comfortable” retirement if the 15% nett contribution is not achieved. “If you are unable to contribute at this level then you will have to either increase the time period over which you save towards your retirement, or you will have to achieve a higher investment return on the invested assets,” he says. Of course it’s better to be safe than sorry. Contributing at a level of 12.5% versus 15% over 35 years will reduce your replacement ratio from 75% to just 63% (assuming annual real returns of 3.5%).
How can fund members ensure they save enough? “Retirement fund savings compete with a number of other expenses for a share of a member’s wallet,” says Danie van Zyl, head of Guaranteed Investments at Sanlam Structured Solutions. He believes that savers should take an active interest in their retirement: “Many members are not even aware of how much they are contributing to their retirement. They are stuck in the defined benefit mindset, assuming that as long as they belong to a retirement fund they will by ok.”
What about fees? Is the 0.9% average administration fee levied by retirement funds impacting negatively on performance? “There is no doubt that a focus on cost containment is a crucial function for trustees and they need to be sure that they keep their fund and its structures and choices simple to keep costs under control,” says Davison. He believes investment costs can be reduced by investing in appropriate pooled vehicles, not splitting assets excessively and making sure that retail investment portfolios aren’t substituted for institutional assets.
“To achieve economies of scale in our fragmented industry, smaller retirement funds are increasingly moving to an umbrella fund arrangement, standardising the benefits provided to members and allowing more efficient administration,” says Van Zyl. Increased competition and transparency will ensure that the 0.9% figure trends toward the large fund experience of around 0.53% over time.
The best advice for retirement savers is to take an active interest in their retirement plan. Find out how much you are contributing each month — and how much of this amount is actually funding your retirement. Richards concludes: “Retirement savers underestimate both the impact of inflation on the cost of living and the risk of longevity.” They should aim for a replacement ratio in excess of 75%, as already discussed.