What South Africans can do today to improve their retirement savings
Andrew Davison the Head of Advice at Old Mutual Corporate Consultants
A portion of South African employees are managing to win the retirement savings battle by making the right investment decisions. This is a positive indicator that the retirement savings crisis isn’t all doom and gloom.
This is according to Andrew Davison the Head of Advice at Old Mutual Corporate Consultants (OMCC) who says that from the data collated in the ‘Old Mutual SA Retirement Gauge 2022’, it was clear that many South Africans are bucking the retirement savings crisis.
The Old Mutual SA Retirement Gauge 2022 takes an authoritative, in-depth look at the retirement savings habits and retirement readiness of South Africans belonging to umbrella funds through their employers’ occupational schemes. The gauge covered about 490 000 active members saving for retirement in retirement schemes set up by about 6 300 employers of all sizes and across all industries.
Davison said: “The cold data revealed that there are some people taking the challenge seriously and doing a lot of positive things to turn the proverbial ship around on their savings status. Despite the sample of those people being small, they demonstrate that saving enough for retirement is entirely possible. We just need to get more people to do the same.”
OM SA Retirement Gauge Findings
Davison said the research found that four key elements differentiated those who had saved enough for retirement from those who faced economic hardship:
1. Save for longer
Members who had long service with an employer managed to accumulate up to eight times their annual salary, on average, after 35 years of service.
The fact is that only a fraction of employees remain with the same employer for that length of time. Many withdraw their pension or provident fund savings when they change jobs, pay the tax and spend the balance and start at zero balance with their new employer.
So, there is leakage out of the system every time people change jobs. One way to achieve a financially secure retirement is to have long service with one employer but the other alternative is to preserve savings from different employers by leaving them in the same fund, transferring to the new employer’s fund or investing in a preservation fund or a retirement annuity in one’s own name.
2. Adhere to the 15%+ savings rule
Members who contributed above 15% of salary have a much better chance of achieving a pension that is around 70% of their salary just before retirement. Encouragingly, a quarter of the members are contributing at this level and a small group of super savers – 4% of provident and 2% of pension fund members – are contributing 20% or more.
“It is quite common to hear people say I cannot afford to save. The reality is that if you are fortunate enough to have an income, the challenge is about figuring out how to balance between your current needs and those that are either unforeseen, like emergencies, as well as those that are foreseen but potentially may seem far off, such as retirement.”
“Saving during your working years is about deferring some of your income, and consumption, to a period when you will no longer be working. It is the careful management and spreading of your own income over your lifetime, not just consuming whatever you get today, on the same day. Admittedly, no-one knows how long they might live or whether they will get to retirement but it’s about planning for the future, no matter how uncertain, so that you aren’t left vulnerable if you do enjoy a long life.
The first step to being able to afford to save is to curtail debt. The same people who claim not to be able to save are often able to afford to pay instalments on credit cards, personal loans or vehicle finance. Eliminating these debts should be accompanied by redirecting the loan repayment amounts to savings. In this way, the pain of paying interest is replaced by the benefit of earning interest, which can dramatically improve a person’s financial situation,” notes Davison.
Those saving more for their retirement understand that any credit facility is damaging for their financial situation. Instead, they delayed the purchase, avoided the loan, saved the equivalent of the loan repayment and were then able to afford the purchase without the need for debt. Over time this diligence pays off in a big way and avoiding or limiting debt puts them in a position to save more.
3. Push back your retirement by whatever means possible
Those employees with better retirement prospects are retiring no earlier than age 65. The Retirement Gauge found that just under half the members are working towards a retirement age of 65 with a third targeting 60.
Retiring at an earlier age, say 60 versus 65, requires a higher multiple of salary to be accumulated in a shorter time to be able to provide the same level of replacement ratio. To provide some idea of the impact of retiring early, someone saving from age 30 would need to save an extra 6% of their salary every month to be able to attain the same 70% replacement ratio. The question one should ask is not when you should retire but whether you can you afford to retire.
For those who work for a corporate the employer usually prescribes a retirement age. Although some employers allow employees to work beyond retirement age in some cases, this may not always be an option. This does not mean that retiring from the corporate means that you need to start drawing a pension. Finding an alternative source of income, even if it’s a contract position or a part time position, may allow you to delay your retirement by deferment, where effectively you say that you would like your savings to be parked until you are ready to start to take a pension.
“The longer you derive this income the further your retirement savings will stretch when you are ready to ‘hang up your boots’ for good,” notes Davison.
4. Know how much you need
A common question for people approaching retirement is “Do I have enough savings?” This is not an easy question to answer as everybody’s needs are different and there are many factors to take into account such as your family situation, dependants, tax, state of health, debt, the kind of annuity you select at retirement and many others.
“A good starting point is to aim for a pension that is about 70% of the salary you were earning before you retired. This is on a gross basis, meaning before tax is deducted. To be able to afford a pension of this level, a 65-year old male would need savings of about nine times their pre-retirement gross salary and a female about 8% more capital than that,” says Davison.
A brighter future ahead
Davison notes that the Retirement Gauge demonstrates that it is possible to accumulate around eight times annual salary in savings for retirement – based on saving from age 30 to age 65.
“Employees shouldn’t feel that it’s almost impossible to save for a comfortable retirement. Many people of all income levels are showing that it’s possible. That doesn’t mean it’s easy. It takes careful planning, thinking about your future self and not just your current self and then having the discipline to stay the course. The financial decisions you make during your economically active years will determine the quality of life you are able to sustain in retirement,” Davison concludes.