A lot can happen in a year. Just one year ago, countries all over the world were going into hard lockdown due to Covid-19. Even before the pandemic, the average South African was struggling to manage their finances and had a dismal track record of saving. The pandemic has heightened the challenging financial times with many struggling to make ends meet, let alone prioritise long-term savings goals such as retirement. You change every year. So should your financial plan.
A year later, as South Africa prepares for the third wave, many are still recovering from the devastating financial impact of the pandemic. This has resulted in South Africans tapping into their retirement savings and investments prematurely to make ends meet. This can have a significant detrimental impact on the income one can expect to receive in retirement.
While the average age of retirement in SA was officially reduced to 60 in 1995, André Wentzel, Head Client Solutions Savings at Sanlam, notes that most people are not able to retire comfortably at that age based on the amount that they have saved for their retirement.
“The traditional concept of retirement was adopted 130 years ago, in a different environment, for a different generation. Since then, the average life expectancy has increased drastically and with many people living well past their retirement age. It is worth considering the impact that delaying your retirement can have on your financial situation in retirement.”
Financial impact of delaying your retirement
Below, Wentzel explains how delaying your retirement by one, three or five years could fundamentally change your retirement savings and enable a better quality of life once you do stop working.
“Firstly, let’s consider someone who started saving 20% of their income at age 25 and is on track to retire at age 60 and maintain their standard of living.
Retiring either a year earlier or a year later can have a 7 to 8% impact on their income. If that’s increased to 3 years, you could expect to receive 20% less income if you retire early but nearly 24% more income if you retire later. If this person were to retire at age 55 they would receive 30% less and 42% more retiring at 65. So, retiring at 65 instead of 55 (which is the earliest you could access your savings) means your income in retirement is more than double”.
Similarly retiring later could help improve you circumstances if you fall behind, whether it’s because you starting saving later or because you had to pause your contributions or tap into your savings due to circumstance like we are experiencing with the pandemic. The rough rule of thumb is that for every year you paused your savings or delayed starting, you can make up for it by retiring one year later. For example, a 60-year-old retiree who saved without interruption from age 25 can expect about the same income as a 70-year-old retiree who started at 35 or who started earlier but who tapped into and depleted their savings at 35.
Of course, not everyone may be in the position to be able to choose to continue their employment beyond retirement age. Many people are also choosing “semi-retirement” – continuing to work part-time after their official retirement to supplement their income. Your greatest asset is your ability to earn. “Even earning a relatively small salary from part time work can make a significant difference in the long term and help to stretch your retirement savings.”
Some of the ways to supplement your income in retirement and ensure the longevity of your retirement savings include:
Consulting and part-time work: Several studies show that older, experienced employees can increase productivity and employment opportunities for a company. Consider semi-retirement which will allow you to consult and do part-time work to bring in an extra income.
Local services: If you are retired, you have the option of helping those around you. Hobbies can also help you earn an extra income, such as walking the dogs in your neighborhood, running errands or house sitting.
Whether or not you consider delaying your retirement or supplementing your post-retirement income, it is important to have a plan in place. In a recent Brand Atlas survey of middle-income earners in South Africa, 41% believe their retirement plans are “a bit vague” and only 1% have a well thought through plan which is being carefully executed. “With the help of a financial adviser, you can put a plan in place that suits your lifestyle and current financial situation,” concludes Wentzel.