Consumers must take responsibility for successful retirement planning
Now that the retirement fund landscape in South Africa has largely moved into the defined contribution space, much of the responsibility for successful retirement planning rests with the individual retirement fund member.
That is according to Windall Bekker, Partner at Rezco Investment Consulting, who says one of the most common mistakes is that clients donot plan adequately in their own right. “Instead, they often expect the retirement fund that they contribute towards to achieve an unrealisticinvestment objective and to assist them with their final retirement planning.”
“It’s crucial, when constructing financial plans, for clients to use investment objectives that are realistic, particularly given that the level of risk and loss increases as the aggressiveness of the portfolio investment objective increases. With proper planning, members can implement other options to producea more holistic and realistic plan that will help them to retire in comfort.”
He says it is a known fact that the current South African retirement landscape is characterised by low provision for most retirees, with very low replacement ratios when they exit their retirement fund – the replacement ratio being a percentage measurement comparing a member’s monthly pension during retirement to their final monthly salary before they stopped working. “Currently, of those who are working and contributing towards a retirement fund, less than ten percent are expected to reach retirement age and remain financially comfortable.
“The goal offinancial and investment planning is to make sure that, when a person reaches their retirement age, they have sufficient financial resources available to them to continue to lead a comfortable lifestyle, and in the industry, the member’s replacement ratio is the usual measurement here. For example, an 80% replacement ratio means that a member would receive R80 retirement income for every R100 that was earned before retirement.
“Some of the main causes of the low replacement ratiosin South Africa include low preservation when retirement fund members change employment and they cash in some or all of their retirement benefit saved to date; low contribution rates as a result of low wages, where members have little or no disposable income; high investment fees and low returns on complex retirement products; and high expectations that the state and/or their children will provide support in their old age.”
With the final responsibility for a financially secure retirement increasingly resting more on the members’ shoulders, Bekker says members need to make sure that they receive expert financial and investment planning to achieve final replacement ratios high enough to enable them to maintain their pre-retirement standard of living.
“The planning process should include, firstly, an analysis of the individual’s current financial position; secondly, making sure that their retirement goals are realistic when matched against their existing investment tools and strategies, and thirdly an analysis of the ‘health’ of the member’s current fund credit and then taking appropriate action while the member is still working, if the member is deemed to be staring a future shortfall in the face.”
He says that if a member’s replacement ratio is below the desired level, they have some options available such as: increase the member contributions to their retirement fund; retire at a later age, or increasing their accumulated fund credit by contributing year-end bonus payments to bolster the size of their retirement fund benefit.
“Members should get expert financial and investment planning advice to make sure that they understand their current replacement ratio, the appropriateness of their investment objective and to determine a realisticplan while they are still working that will provide some security when they retire,” Bekker suggests.
