• Rainier van der Nest

Managing retirement income

Poor savings behaviour in South Africa

A common challenge for financial intermediaries is that the average client does not save enough. This is never quite as evident as when such a client reaches retirement and expects their retirement savings to provide the same level of income as they were earning before retirement.

So why does this occur? The Sanlam Benchmark Survey highlights the following differences between ideal savings behaviour, and the reality:

  • People start saving too late (28 years of age vs suggested 23).

  • People save too little. (The average savings rate is 7% vs the suggested minimum of 15%).

  • 62% of individuals do not reinvest retirement savings at retrenchment or job changes.

  • 38% don’t get retirement saving advice.

  • 90% do not ever relook their pension options after initially signing up.

92% of retirees do not have adequate savings

A person’s retirement savings are deemed adequate if they can replace at least 75% of their final income, something only 8% of retirees achieve. This leaves a staggering 92% of people under the 75% income replacement ratio. Yet quite often, clients only start engaging with financial intermediaries at retirement stage, expecting to receive the same salary during retirement. However, figures from the Sanlam Benchmark survey show that the actual income replacement ratio is closer to 40% of final salary. This is far removed from the preferred 75%.

The fact that many people can only replace 40% of their final salary during retirement leads to other dilemmas. The Benchmark research shows that 51% of retirees struggle to make ends meet, and that a third of retirees can’t cover their medical expenses.

Retirement realities

Is there an ideal solution to address all of these issues? Short of actually saving more, starting to save earlier, working longer, and importantly – preserving retirement savings when changing jobs, the answer is unfortunately NO. The reality is that at retirement, clients need to understand that their retirement savings have a certain income purchasing value, which is not necessarily going to be the same as their final income pre-retirement.

If clients draw income above this value, the chances of facing longevity risk (outliving their savings) become exponentially higher. If they try to grow their retirement savings by investing more aggressively, they then increase their market risk exposure. The combination of both of these factors increases the risk of capital depletion in future.

So what are the realities we need to come to terms with?

  • Clients who reach retirement without having saved enough will have to make some tough decisions, together with their financial intermediaries.

  • The main objective of retirement planning is to ensure a sustainable retirement income for the remainder of one’s life. This may mean starting off with a lower income in retirement, in order to ensure that the capital lasts.

  • he client, together with their financial intermediary, should consider all available retirement income options. For some clients, an Investment-Linked Living Annuity (ILLA) may not be the best solution. For many retirees, combining an ILLA with a guaranteed annuity may be the best way to secure a sustainable income.

At the point of retirement, it thus becomes extremely important that a client, together with his financial intermediary, start planning this income stream based on the assets they have to work with. This is not a once-off exercise. It is equally important for retired clients to meet with their financial intermediaries at least annually, to review their portfolios.

Glacier’s ICE tool is a valuable resource that can assist with determining the appropriate income withdrawal so that a client’s capital is not depleted.

Let’s look at an example:

  • 60 Year-old male

  • R5 million retirement savings

  • Requiring income of R30k (7.2% initially) per month escalating with 7% per annum.

The income illustration shown below reflects a moderate risk profile, assuming 10% portfolio growth per annum. At age 73, the income escalation is no longer sustainable, which means that income starts depleting in real terms. The illustration below also shows capital depletion.

Scenario 1: Living Annuity with R30k monthly income

To provide a more sustainable real income, we need to start with a lower retirement income. The illustration below shows an income of R20k (4.8% initially) per month using the same scenario. The income stream is more sustainable while still maintaining purchasing power. We also see that the capital is preserved.

Scenario 2: Living Annuity with R20k monthly income

Working through these scenarios together with the client can be a sobering but valuable exercise. A financial intermediary can use these examples to show clients the benefit that a lower staring income has on both the sustainability of their income stream and capital preservation.

Effect of starting with a lower income in year one: Comparison of annual income

How to optimise a client’s retirement income

The next question to ask is whether the proposed scenario could possibly be optimised. Consider initially splitting the retirement capital into a Glacier Investment-Linked Living Annuity and a Glacier Investment-Linked Lifetime Income Plan (ILLI). The ILLI combines features of the guaranteed annuity with the investment flexibility of the ILLA.

The following illustration compares scenario 2, where R20k per month was used, with a third scenario, splitting the retirement capital between an ILLA (70%) and Glacier’s ILLI (30%).

For this scenario an allowance was made for a spouse to continue to earn an income after the client passes away. Allowance was made for 50% of income and assumed the spouse was aged 60.

To provide for additional planning in favour of dependants, the scenario also includes a 10-year certain term, where the full income will be paid to beneficiaries for 10 years after the client passes away.

Lastly, a 3% income acceleration was used, allowing the investor to boost income in the early years by ‘borrowing’ from future income growth.

ILLI/ILLA combination versus scenario 2: Comparison of income

In the illustration above the red and grey bars show the total annual income from the ILLI/ILLA combination, while the blue line shows the income from the ILLA under scenario 2. Although initially the income streams are similar, the ILLI/ILLA combination provides a more sustainable income to benefit the client later in retirement.


Ideally clients want to retire with the same income as their pre-retirement salary, yet reality shows that this seldom happens. Effective retirement planning throughout the entire retirement lifecycle is one of the greatest value propositions today’s financial intermediary can strive to offer clients, in order to ensure a successful retirement outcome.

It is the role of a financial intermediary to guide retirees, and those entering retirement, through a process of understanding that an optimal income stream is more ideal than trying to start with an income stream that is the highest in year one.


About Glacier

Endorsed by Sanlam, Glacier offers a wide range of investment solutions, designed to assist clients to create and preserve their wealth throughout their lifetime. These solutions include local and international investments, pre- and post-retirement solutions as well as share portfolios. We also offer a number of guarantee-type products for investors seeking certainty in the current market volatility. For more information, please visit www.glacier.co.za

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