Overcoming retirement fund challenges - Education and legislation are vital

While the message that savings for retirement from an early age is slowly getting out there, education and legislation are fundamental in bringing about lasting change to the industry.

A serious lack of information dissemination and education in terms of retirement funding has resulted in people making uninformed choices, the results of which are only felt when retirement age hits.

Consumer perceptions

Trends reveal that people only really start thinking about contributions to a retirement fund in their late 30’s. This often amounts to less than 30 years of saving to sustain perhaps 25 years of retirement after retirement age of 60 or 65.

People also underestimate the effect of inflation and the increasing cost of healthcare - and other health issues generally - that occur during retirement and place additional pressure on funds.

How much is enough?

If one starts saving early at a reasonable rate of return and builds up, as soon as possible, to a minimum savings of 15% of one’s salary, one should have reasonably adequate funds at retirement. People can generally live off around 70% of their monthly salary at retirement since they are likely to have fewer expenses. However, there are still too many funds with a savings element of less than 15%. Risk and expense deductions often account for 2 to 3% of this, so the member really only ends up with about 12% going into retirement savings. This falls far short of the funds needed to sustain their lifestyle during retirement.

The right returns

Research reveals that 70% of contributing members under 50 are in conservative portfolios. By moving to a medium or aggressive portfolio, their returns will be significantly greater over the longer term. The bottom line is that people are not advised adequately, and so make a passive rather than an active choice.

Increasingly, funds are introducing individual investment choice to members. But this should be accompanied by two carefully thought out default portfolios - one conservative and one aggressive. Blue collar workers usually invest in a more conservative fund, but should be encouraged to go a more aggressive route on a long-term basis so they get more out at the end.

Preservation problem

Unlike many other countries, South Africa has no legislation enforcing the compulsory preservation of funds when employees change jobs. Recent legislation resulting in less tax payable on withdrawing retirement savings has also not improved the situation. The lack of preservation is the major reason why less than 10% of people in retirement are financially independent.

Should a person at 20 start investing 15% of their salary in a reasonable market- linked balanced portfolio, they will end up with around 100% of their salary at retirement. If, however, at 30 they take out the money and start contributing to a new fund, they will end up with only 60% of their salary. And, if they remove the money again and only start contributing at 40, they will end up with about 35% of their salary at retirement.

Education and legislation

Retirement funds should provide members with an individual benefit statement which shows, inter alia, what their likely replacement income will be in retirement. Professional financial education should be available for members. More attention must be given to counselling and providing information, to empower members to make reasoned, responsible decisions about upping their contributions, investing in a less conservative investment portfolio and preserving their savings when changing jobs. Compulsory preservation should be welcomed by the industry.