Competing priorities
Life is tough. There always seem to be more expenses than money in the purse and the price of everything seems to be going up faster than your salary increases. There are so many things competing for a share of your hard-earned money, and most of them are due now or at least sometime soon.
This is why most South Africans fall into the “I’ll save for retirement when I have enough money” trap. And we are not alone. The Wall Street Journal recently published an article dubbing many of today’s US pre-retirees the “Ostrich Generation” – observing that they are sticking their heads in the sand instead of proactively working on a retirement plan.
However, if you think life is tough now, imagine yourself in your 60’s or 70’s, unable to work, living off your savings or perhaps frail, with insufficient income. The “enough money” you were dreaming about may never happen as our lives get increasingly more demanding and complex and we continue to delay saving for retirement.
This article touches on a handful of issues facing pre- and post-retirees in the current South African socio-economic climate.
SA latest retirement statistics
Let us start with some recent and very sobering statistics regarding retirement in South Africa:
A 2011 survey*** has found that an alarming 80% of pensioners have not completely achieved their pre-determined retirement goals.
Another survey form 2010** paints a similar picture, with only 26% of retirement plan members having adequate funds at retirement. The other 74% experience a shortfall.
According to the 2011 Old Mutual Retirement Monitor, only 54% of respondents (all in full time employment) who are currently 10 years or less away from retirement age are actually saving for their retirement.
Keeping up with the Radebes
Saving habits are more of a question of priorities than a question of having “enough”. South Africans in particular choose to overspend in order to keep up with what is perceived to be the acceptable standard of living. Almost 90% of South Africans spend more money than they earn – growing their debt and leaving no room for savings and investments.
According to a 2011 survey*, young working South Africans prefer the acquisition of assets (like cars and houses) to retirement savings. As consumers move into middle age, paying for children’s education takes precedence over saving. As would be expected, retirement saving only becomes a top priority when individuals start heading into the older age brackets. However, by then, the time remaining is short and the ability to accumulate enough savings is seriously diminished.
Employer guaranteed pensions are a thing of the past
Things have certainly changed in South Africa in the past 20 years, and these changes extend right through your finances.
Up to about 20 years ago, defined benefit (DB) pension schemes were the norm. They were called that because, quite simply, your benefits were defined. After a number of years with your employer, you were certain to receive a pre-determined percentage of your final salary. What’s more, this was guaranteed for life and with inflation increases every year. Presto! No need to worry about a thing, it was all taken care of.
DB schemes have largely been phased out, replaced with defined contribution (DC) plans. As this name suggests, it is your contribution amount (as a % of your monthly salary) that is defined. Your benefit is not pre-determined.
A DC arrangement works very much like a savings account – you get out what you have put in plus or minus returns on your investment (net of expenses/fees). Therefore, if the contributions are not sufficient, or the investment return is too low, or the expenses are too high, the end result is a shortfall in your retirement pot.
You can no longer sit back and rely on a steady pension income from your employer sponsored retirement plan. The ball is firmly in your court. You need to manage and drive your own retirement savings, be it with your employer or through a private policy and hopefully with the aid of an experienced, knowledgeable investment adviser.
Longevity
Living long is a blessing, no doubt. Medical advancements extend our life spans, as does the increasing awareness of healthy life habits. This trend has been observed globally – people live longer.
South Africans, however, underestimate how long they will live post retirement – according to a recent survey*, almost half (43%) of workers surveyed expect not to live more than 10 years past retirement age. Statistics disagree.
Data from the South African Annuitant Standard Mortality table shows that more than 50% of men who survive to age 65 will survive past age 80, and that more than 50% of women who survive to age 65 will survive past age 85. In other words, those who plan on retiring at age 65 need to plan for at least 20 years of retirement income, and maybe even more.
This in part explains why nearly half of the pensioners surveyed believe that they do not have sufficient funds to last them through retirement.
My children will look after me
Some decades ago it was not only acceptable, but even expected, that children and grandchildren would look after the aged. This trend, too, has changed.
A 2010 survey** shows that a very small percentage of post retirement income is expected to come from family support. In fact, while a number rely (at least in part) on financial assistance from children or other family members, a significant portion of pensioners are primary breadwinners, in many cases supporting both adult and minor dependents. In fact, 58% of retirees have some dependants***.
There are many reasons which may be suggested here: high unemployment rates, especially among the youth; high HIV rates, leaving grandparents fending for the grandchildren, etc. Whatever the reasons, the facts are stark. You have to rely mostly on yourself in your golden years.
I will work into my retirement
58% of South Africans expect to work after retirement, and the majority says they will need to do so for financial reasons**. This is fine if you are fit and healthy at 70. However, what if you are too frail or too ill to work?
In addition, with the high youth unemployment rates in SA, a retiree might simply not be able to get a job, part time or full time, as these would most likely go to the youth. Thus planning to work through your retirement is not much of a plan at all.
What to do next?
If you are still not convinced that you need to start putting away for your golden years, then take some advice from your elders***:
"Pensioners are again very clear in their advice to active members who still have the opportunity to take corrective measures:
- Start investing and saving as early as possible
- Start planning for retirement at an early age
- Make more enquiries and learn more about investments, investment choices and retirement".
What we would like to add to this list is:
- preserve your retirement savings when you change employers,
- always remember the power of compound interest, and
- get financial advice, get it early, and get it often.
* Source: Old Mutual Retirement Monitor 2011
** Source: Old Mutual Retirement Survey 2010
*** Source: Sanlam Benchmark Survey 2011
Contact Stephen Leppan for financial advice and more information:
Stephen Leppan
074136775
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