Saturday, September 14, 2024

Run on numbers: State of the retirement industry in SA

In South Africa, the average retirement income varies greatly depending on a variety of factors. File photo

Published Aug 10, 2024

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According to www.rateweb.co.za, “Year after year, a large proportion of respondents have been partially or strongly of the view that they will need to continue earning a living after their formal retirement date: 77% in 2020; 74% in 2021; and 71% in 2022 and 2023.”

A valuable tool is the use of the 4% rule

A widely-accepted guideline for retirement savings is the 4% rule, which states that you can withdraw 4% of your retirement savings annually without significantly depleting your nest egg. To estimate the amount you need to retire, divide your required annual retirement income by 4% (0.04).

For example, if you need R500 000 per year (R41 667 per month) during retirement, divide R500 000 by 0.04, which equals R12 500 000. This is the amount you should aim to save for your retirement.

Keep in mind that the 4% rule is not foolproof and should be adjusted based on factors such as your risk tolerance, investment strategy, and economic conditions. This is unfortunately a very disturbing number. The sooner a worker accepts this the better their chance of a peaceful retirement.

Another handy rule is the rule of 72. This is a quick, handy formula that can be used to estimate the number of years required to double your investment at a consistent compounded rate of return. Conversely, you can work out the return required to double your money by compounding your money in a given number of years. To calculate the number of years it will take for an investment to double, divide 72 by the expected rate of return.

For example, if the expected return is 6%, the investment will double in 12 (72 divided by six) years. If the rate of return is 10% the number of years will be 7.2 years. To calculate the return required to double your money in a specified period, divide 72 by the number of years. For example, if you want your money to double in eight years, you will need a return of 9% (72 divided by eight). Source: Investopedia

In South Africa, the average retirement income varies greatly depending on a variety of factors such as the individual’s age, occupation, and level of savings. According to Statistics South Africa, the median monthly income for South Africans over the age of 60 in 2020 will be around R7 000. The capital amount required would therefore be R175 000. But averages can be misleading and for a person used to a salary of R30 000 per month knowing he is above average is of no help.

Diego Iturralde, chief director for Demographic and Population Statistics, said over half of the population is female, totalling around 32 million. “According to the report, life expectancy at birth in South Africa is now 66.5 years, a significant increase from the estimated 53.6 years in 2005,” he said.

According to the UN Revision of World Population Prospects 2022, South Africa’s average life expectancy is projected to increase to 76.4271 years of age, by the year 2100. A total increase of the average life expectancy for people living in South Africa by 14.29% by today’s standard. This positive trend can be attributed to technological advancements, a better standard of living, and an increase in healthcare availability.

Life expectancy is a major factor in any retirement plan.

Between 1950 to 2024 the average life expectancy of people living in South Africa has increased from 43.4715 to 66.8683 years. That is a 53.82% increase that allows people of the country to live an extra 23.3968 years of life, on average.

Historic life expectancy in South Africa (1950-2024)

Between 1950 to 2024 the average life expectancy of people living in South Africa has increased from 43.4715 to 66.8683 years. That is a 53.82% increase that allows people of this country to live an extra 23.3968 years of life, on average.

According to the 2024 estimates, about 27.5% of the population is younger than 15, while about 9.7% (6.1 million) are 60 or older.

Can a person consider retirement if he/she has a choice? Across age groups, 71% of respondents were partially or strongly of the view that they would need to continue earning a living after their formal retirement date.

However, the inconvenient truth is that a large/major proportion of South Africans cannot afford to stop working. On retirement, certain expenses incurred by working people fall away, and retirees can maintain their standard of living on a substantially lower income. Examples are travelling expenses to work, lower maintenance expenses on your vehicle, your home bond is probably paid off, children-related expenses fall away, and a lower tax rate is applicable. Although some expenses may decrease, you can count on other expenses to rise, such as healthcare-related expenses.

How much capital is needed to retire?

It is a general accepted fact that on average one will require between 70% and 75% of your pre-retirement income once a person goes on retirement. According to the 2023 Brand Atlas Survey, they tracked the lifestyles of 15.4 million economically active South Africans.

This article is hardly any comfort to the 47.6 million people who are not in employment. In 2022 there were 5.6 million people aged 60 or older in South Africa, representing 9.2% of the total population. A very disturbing fact is that almost three-quarters (73%) of South Africa’s elderly are beneficiaries of a state old-age grant. That leaves us with only 1 522 000 people over 60 that are not dependent on the state for an income.

The government is concerned about the National Health Industry and with good reason. The retirement position of the nation is also in a dreadful position. In the longer run the large guarantees required by the state to prop up any shortfalls in the GEMPF is a burden which requires us to watch over it like a hawk and in addition, the government must ensure there is a liveable income for its other seniors. The old age grant of R2 180 does provide the most basic food, but it leaves the elderly in a very vulnerable position.

* Kruger is an independent analyst.

** The views expressed herein are not necessarily those of Personal Finance or Independent Newspapers.

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