• Just SA Press Release

Will the retirement of your dreams be beyond your means?

Working out how much is JustEnough to save for retirement is sometimes not a priority when simply making ends meet is a struggle. But realistic retirement planning is important if we want our retirement income to match what we expect it will be.

“South Africans are underestimating the proportion of their retirement income they will need to allocate to basic living expenses and the amount of money they will need for discretionary income. In fact, we found in the latest Just Retirement Insights that there is a major gap between expectation and reality,” says Bjorn Ladewig, longevity actuary at Just.

According to Just Retirement Insights – independent research commissioned by Just – South Africans’ expectations of what their retirement income will be, based on current savings and returns, will not be realised. On average, respondents expect a monthly income in retirement of almost R12 000. This implies an expected annual income rate of 8%, based on their average retirement savings of R1,8 million. However, in current market conditions this expectation is not achievable – guaranteed lifetime income that targets inflationary increases provides an annual annuity income rate of approximately 6,5% for a couple where the male is aged 65 and his female spouse is aged 61.

This means that, to achieve the expected level of income, 22% more needs to be saved to reach R2,2 million. Even worse, if the expected level of income is to be achieved through a living annuity, a retirement saving of R3,6 million is required. This figure is based on the draft maximum sustainable income rate recommended by the Financial Sector Conduct Authority for living annuities for a similar couple, which is only 4%, compared to the 6,5% above.

The gap is a problem for all

The gap between expectation and reality is evident for all income groups, as the following survey results from Just Retirement Insights show:

These expectations are not realistic if compared to the 6,5% income rate achievable in current market conditions, as set out above, for a typical retiring couple. This “expectation gap” is even bigger for higher-income groups.

The impact of debt and longevity

According to the Schroders Global Investor Study 2018, South Africans are under-saving by six percentage points, when looking at what they expected to get out of retirement savings, compared to what they put away.

The study shows that retirees are receiving a much lower proportion of their final salary in retirement (59%) compared to an expectation of a comfortable 80% of final salary. This contrast is far greater than what is being experienced globally, where retirees predicted that they would need an average of 74% of their current salary or income to live comfortably in retirement, but are receiving 61% of their final salary annually.

Approximately 56% of middle-income consumers in South Africa spend all their monthly income in five days or less after receiving it. This is according to data from FNB’s Retail segment, which categorises middle-income consumers as those who earn a gross monthly income of between R7 000 and R60 000. High spending and limited savings cause consumers to rely on credit to get through the month, making them more vulnerable to being caught in a debt trap and less able to save comfortably for retirement.

Putting off saving for retirement until later in life (even in higher amounts) rarely outperforms earlier savings, because of the impact of compound interest – earning interest on the interest you have already earned. Compound interest has a positive snowball effect on your savings, which means that the earlier you start saving, the better.

According to a BBC article written by Brian O’Connor (“The unrealistic expectations of retirement behaviour”, 2019), a survey from American financial services company Northwestern Mutual showed that one in three baby boomers has $25 000 or less saved. According to Money Advice Service, most retirees also underestimate how long their retirement years will last. Only planning for 20 years may mean running out of money – especially as m