We all want to retire comfortably after decades of hard work. This means we need to ensure we have a healthy income lined up to last us through to our final days. But here’s the snag.
With an average net pension replacement rate of only 17% of current earnings, many South Africans will face tough decisions or serious adjustments to their lifestyles to survive their golden years.
“As a society we need to address the lack of retirement savings in our country. At the same time, we need to ensure that those who are saving diligently are able to benefit from their savings during their retirement,” said Marwan Abrahams, Executive General Manager at Old Mutual Personal Finance.
The 2018 Mercer pension index found that South Africans receive on average the lowest income in retirement among countries with a functioning pension system.
“The reforms currently being looked at by government aim to address some of the problems with the current system, including low levels of preservation. These reforms however are taking place in a strained economic environment with already low levels of savings where consumers are feeling the pinch with VAT and petrol increases,” said Abrahams.
The 2017 Old Mutual Corporate Retirement Monitor saw a dramatic decrease in the number of employees who would preserve their savings should they resign from their position.
According to the survey 35% of working South Africans indicated they would probably cash-in their retirement savings should they have the opportunity, up from 19% in 2012.
“This trend is particularly alarming when you consider that 40% of metropolitan working South Africans and 1 out of 3 Baby Boomers (those born before 1965) have made no formal retirement provision, according to the 2018 Old Mutual Savings and Investment Monitor.
Further complicating the retirement debate is that we are living longer and economic factors such as the rising price of electricity, petrol, education and food are constant reminders of how increasingly difficult it is to make ends meet today, let alone save for the future.
Abrahams adds that people often reach retirement age before realising that there just isn’t enough to carry them through for another 20 to 30 years.
This means they must continue to work for longer than they planned or lower their standard of living, or both.
What is enough?
“If you retire at the age of 65, you need to accumulate between 10 and 14 times* your annual salary by the time you retire,” says Abrahams. “This should help you to secure a retirement income that is at least 75% of your salary.”
For example, if you are 25 years old, earning R10 000 a month and start saving R1 200 a month from today, you should be able to accumulate capital equal to 10 times your annual salary by the age of 65 (taking inflation and increases into account, both at 5%).
However, if you are 45 years old, you need to put away R3 600 a month to reach the same multiple by the age of 65.
5 Steps to saving for retirement
- Step 1 – Start today. The time is now. If you find it difficult to spare an extra cent, think of where you can cut back. A DStv subscription costs approximately R 900 per month. If you save that money instead, with a potential return of 8% for the next 20 years, you could save R 850 000.
- Step 2 – When you get your salary increase, increase your premiums.
- Step 3 – When you get a new job with a higher salary or a promotion, increase your premiums again.
- Step 4 – When you get your bonus, inject a lump sum into your retirement.
- Step 5 – With the new tax year looming, take full advantage of the tax benefits for saving for your retirement.
Choose the right retirement income solution
This can seem tricky. Many people outlive their retirement savings because they choose a living annuity and draw down too much of their savings in the early years of their retirement.
Current thinking suggests that if you expect to live longer than the age of 80, you might be better off buying a guaranteed or life annuity that increases over time with inflation.
Although the initial income may be lower than what you could draw down from a living annuity, it may be higher at a later stage in life if it increases with inflation. You also have the added benefit of a guaranteed income for as long as you live.
Consider a combination of a living annuity and a guaranteed annuity to balance your current and future income needs.
The living annuity may be able to support a higher immediate income and the guaranteed annuity will ensure that there is a basic guaranteed income for life, providing some protection if the drawdown rate from the living annuity becomes unsustainable.
“Due to increasingly sophisticated retirement products, it is vital to speak to your financial adviser or broker about the best way to plan for your retirement, no matter which life stage you are currently in. The most important step is to take responsibility and put a plan in place today to bring you real peace of mind and financial security tomorrow,” said Abrahams.