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Retire another day Mr Bond?

01 August 2014 Viresh Maharaj, Sanlam Employee Benefits

Otto von Bismarck defined 65 as the ideal retirement age in 1850. This was done when most people died in their 40's. If we followed Von Bismarck’s reasoning, today's equivalent age would be 103. Are we as an industry on the same page?

The world’s first pension scheme was conceptualised and implemented in Germany in the 19th century by chancellor Otto van Bismarck. Up until the advent of this revolutionary vehicle, German workers typically worked until they dropped. Workers that reached the age of 65 faced a life under a very new label, that of the world’s first retirees. It must be noted that the average life expectancy of a German worker at that time was about 45, which means that very few individuals made it to their retirement.

Mankind’s greatest inventions

Over the course of the 20th century, particularly after the second World War, the retirement fund as a vehicle to provide a measure of financial security in the old age spread across the globe, and became a key feature of the development of economic and social policies. The investable assets of workers could be channelled efficiently towards the nation and economy building. It has been one of the driving forces of global development and should be viewed as one of mankind’s greatest inventions.

Over that same period, global life expectancy increased by about 20 years due to the improvements in public health, medical technology, better pharmaceuticals and changes in lifestyle, while the retirement age across many public and private retirement funds has hovered at the same level as in 1900.

Medical breakthroughs a major driver

Anticipated improvements in medical technology have had the potential to increase human lifespan dramatically, which has led to achange in the nature of retirement. Individuals now face a reality that is far different to the one that they have been planning for through their working careers and we, as the financial services industry, need to take the lead in developing solutions that are relevant in this emergent context.

The issue of raising the retirement age has been broached in developed nations and we need to have a candid debate on this matter in South Africa. According to the 2014 Sanlam Benchmark Survey, the average South African only starts planning for retirement approximately 11.2 years before retirement age. This is not long enough to make a material difference in the quality of their retirement savings, especially given the increased longevity. Moving out of the retirement age provides more of an opportunity for employees to benefit from the power of compound interest within a tax effective vehicle.

Take the following variables into consideration:

Retirement fund at age 60,WORTH R1 000 000
• Salary                  R300 000
• Return                 8%
• Salary Inflation    7%
• Contribution        13% of salary

According to this scenario, delaying retirement by six years will result in the value of the retirement fund doubling, thereforeby prolonging retirement for 10 years will result in it tripling.

The survey indicates that 46% of South African pensioners actually took an early retirement package without fully understanding the financial consequences of doing so. As such, government may wish to consider the conditions under which early retirement may be effected to channel individuals to make better decisions that lead to better outcomes in retirement.

Being the crucial link

Advisers have a critical role to play in providing advice that takes into account increased longevity before and during retirement. Given the increases in lifespan, one’s investment horizon becomes even longer, which may enable investing in riskier assets than previously thought. Furthermore, drawdown advice for living annuities needs to be contextually relevant given the longevity argument, so that retirees are able to manage their risk of depleting their retirement fund.

As an industry, we must break down the silos that exist between ourselves and the medical research and pharmaceutical industries in order to better understand futuristic innovations.

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