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.
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:
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.