By Mariska Comins, Head of Technical Support, PSG Wealth
According to National Treasury, only 6% of the population will have accumulated enough money to retire comfortably, without having to sacrifice their standard of living. This number is incredibly low, and what it implies is that less than a tenth of the population will not have to rely on the state (government) or family/friends for financial support post retirement.
A contributing factor to such low retirement savings is that South Africans in general have a very poor savings culture. Financial literacy is the knowledge necessary to make important financial decisions and unfortunately a large proportion of the population have low levels of financial literacy and limited access to proper financial advice and products. About 50% of South Africans do not have retirement plans. Of the working population that have a retirement product or products, around 50% can or will retire with less than 20% of their replacement ratio. The recommended ratio is 70% or more. This translates into a very real challenge of financial stability amongst retirees. More tangibly, this implies that around 61% of retirees are unable to make ends meet.
Saving for retirement should be a primary lifestyle goal to ensure financial independence. The reality is that if we fail to plan for retirement, we plan to fail for our own retirement needs as an increase in longevity, rising health costs etc will mean that we place our retirement lifestyle at risk.
Charting the path to a comfortable retirement
While you are working and earning a monthly income, you are most likely able to pay the necessary household expenses involved in providing security, transport, food, bond payments/rent, etc. After retirement, your income must be funded from investment products which you accumulated during your working years (pre-retirement funding).
The first step to securing a comfortable retirement and being able to leave a positive financial legacy for your family is to have a comprehensive retirement plan in place. Having a comprehensive retirement plan enables you to:
- Determine how much to save or invest during your working years
- Invest into suitable investment products
- Optimise your investment returns and measure progress towards retirement goals to minimise your risk to a reduced standard of living at retirement; and
- How to wisely use your retirement income to fund and sustain your retirement needs.
Changing your ways
It appears to be fairly simple: you spend your working life saving and then at retirement you spend the rest of your life enjoying the fruits of your labour. However, reality is far from simple as we sometimes don’t have much control over economic conditions and lifestyle changes.
While most individuals want to save for retirement, it takes dedication and discipline to change savings and spending behaviour. Ill-disciplined behaviour and/or unforeseen changes to circumstances are the main contributors that lead to an income gap at retirement that results in having a lower standard of living in your retirement years.
How much do you really need to retire?
Most clients underestimate the amount of capital that will be required at retirement. Herewith some of the common reasons why you might not have enough capital to provide sufficient income during retirement:
1. Retirement age
Changing jobs (for whatever reason) is not unusual nor is it a negative move. However, more often than not, retirement fund members do not preserve their retirement capital when they change jobs but rather take a cash withdrawal to settle debt or fund other expenses. This decision of not preserving retirement capital can put you at high risk of retiring with insufficient funds. When you resign and/or change jobs, seek professional help regarding resignation benefits or try not to be swayed by economic and lifestyle choices.
Due to the decrease in purchasing power of money over time, sufficient retirement capital should be accumulated to provide for an escalating income need. Failure to do so will lead to an income gap at and after retirement.
3. Life expectancy
Individuals’ life expectancies are increasing. This increases the period for which most of us will need to make provision after retirement and thus more capital is required to sustain post-retirement income needs. Apart from the inflationary pressures on medical costs, the need for medical care and related cost is generally higher after retirement and these additional costs increase the income need during retirement.
4. Non-pensionable fringe benefits and income
The impact of the loss of employee benefits such as subsidised medical aid contributions, group life insurance, company vehicles and housing allowances are also often underestimated.
As a member’s retirement interest may be seen as part of his or her assets to be taken into account when determining the asset distribution, it goes without saying that divorce may well affect the member’s eventual retirement capital.
Our behaviour towards spending and saving may be difficult to change. However, if we want to make provision for a comfortable retirement, our attitude towards borrowing and investment need to change. It is important to seek the professional services of a trusted and qualified financial adviser to compile and/or review your retirement plan. It is never too late (or too early) to start saving for retirement.