Retirement / 8 November 2019, 3:00pm / Martin Hesse
WORDS ON WEALTH
Last week, I looked at South Africa’s poor saving rate, as measured by the Investec GIBS Savings Index, and at a few “miracle” countries where a saving culture was a vital factor in their economic growth. Admittedly, there was a fair degree of forced saving through government interventions and, in one case, restrictions on consumer loans and on the consumption of luxury goods.
In South Africa, companies are not compelled to offer pension benefits to their employees, but most of them do. The snag is that employees are not forced to preserve their savings on leaving a company.
While the government has not taken the drastic step of forced preservation, it is intent on preventing you, as far as possible, from cashing in before retirement. The tax you pay if you cash in is prohibitively high (to offset the generous tax incentives for contributing to a pension fund), and the new “default” regulations have introduced further measures, such as retirement benefits counselling, to encourage you to preserve.
In June, Personal Finance reported on Sanlam’s annual Benchmark Survey of retirement funds, which showed there were promising signs from pension funds that retirement benefits counselling was proving effective in boosting preservation rates.
Financial education is an important tool in promoting a saving culture. The report accompanying the Investec GIBS Savings Index, “The path to prosperity for South Africa”, quotes research that shows a correlation between a country’s financial literacy levels and its household saving rate.
But education does not automatically lead to behavioural change. A major change of behaviour takes effort, and people are unlikely to put in the required amount of effort on knowledge alone. Smokers are continually reminded that smoking is harmful, but they light up regardless.
There is a strong emotional component to behavioural change, which the Sanlam Benchmark Survey research touched on and which is worth exploring in further research.
Viresh Maharaj, actuary at Sanlam Corporate, says the survey revealed that most people start becoming concerned about retirement only in their 40s and 50s.
This may simply be because retirement is looming closer on the horizon. But there is another intriguing possibility. Maharaj says. This is about the time people may see their parents in retirement begin to struggle financially, and it’s only then that the reality of not having enough to retire on hits home.
“It often takes something tangible to cut through apathy. Getting people to care about something intangible, such as retirement, goes beyond financial education. We know what’s good and bad for us, but our behaviour doesn’t change until a catalyst is applied.
“The only way we start to engage as consumers is if we start to care. That’s the trigger to change behaviour,” he says.
In this instance, observing one’s parents in retirement may be the catalyst that impels individuals to take stock of their own retirement situation. We need to be jolted into caring enough - about our own future needs and those of our loved ones - to justify the extra effort.
Maharaj uses the analogy of the Cape Town water crisis. Although the worst of the crisis is hopefully over, Capetonians have adopted an enduring water-saving mindset. It has hit home that water is a scarce commodity not to be wasted. Capetonians care because, for them, an abstract idea has become real.
The problem with retirement planning is that by your mid-40s it is too late to make a meaningful difference to what you have saved, or to start saving. You ideally need to have adopted a saving mentality by the time you first start earning, in your 20s.
What, at this younger age, could be the catalyst for caring, for making the intangible tangible?
“It could start with a conversation,” Maharaj says. “Young people need to sit down with their parents, grandparents or other ‘elders’ in their lives, and ask them if they feel ready to retire, or, what they’d do differently if they’ve already retired. Or if you have children or grandchildren in their 20s, do the same and help them to understand what you have learnt.
“Then you need to take the lessons learnt and implement changes in your own retirement savings journey. As a young person, you have time on your side. The trick is to care, to get educated and to then take action.”