Early retirement - not ideal during the current economic climate

Unless you save at least 15 times of your annual salary by the time you retire, it is not advisable to take early retirement, says NMG Benefits, Head of Retirement, Craigh Chidrawi.

NMG’s retirement fund administration database of stand-alone and umbrella fund members undertook an analysis to identify trends, to assist retirement funds and employers to benchmark themselves against other retirement funds and the industry in which they operate.

The data analysis covered the information for approximately 163,000 members that are on the NMG retirement fund South African administration database as at July 2021.

According to NMG Benefits data, the average member has only three-quarters (75%) of their annual salary invested for their retirement in their current fund. This has decreased since 2019 when members had saved 103% of their annual salary.

Chidrawi’s concern is that members are not on average saving enough for retirement. On average, members invested 9.47% in 2021, compared to 2019 when they saved 10.7% of their salary for their retirement.

“This shows an increase in the percentage of members contributing less than 10% of their salary. In 2021, 51% of the members compared to 16% of members in 2019 contributed less.

The average replacement ratio across all the active NMG retirement fund members has dropped to 32% in 2021 from 35% in 2019.

“This means that the average active member can expect an income after retirement that is 32% of the salary that he/she is expected to be earning before retirement,” says Chidrawi.

The significant reduction in the contributions being paid to retirement funds highlights the dire effects of the Covid-19 pandemic on the economic situation.

During the COVID-19 induced lockdown, many retirement fund members lost jobs due to the closing of companies or opted for salary reductions due to business scaling down operations.

The reason is that during this period the members were desperate for their money. They were not leaving their jobs and moving to another one but leaving because they did not have new work. That desperation forced them to take early retirement benefits.

Chidrawi stresses that allowing members to retire later gives the member the opportunity to increase their retirement savings and lessen the time required to live off their retirement savings.

Currently, the most common normal retirement age is 65 years (2021: 38.97%; 2019: 56.21%). The next most common retirement ages are age 63 (2021: 37.21%; 2019: 20.77%) and age 60 (2021: 22.63%; 2019: 22.19%).

“To ensure that members are securing a financially stable future, they need to increase their current savings rates and start saving earlier.

“It is essential that when members are given the option to reduce the contribution to the retirement fund, they are made aware of the long-term effect of a low contribution rate on the income that can be expected at retirement, concludes Chidrawi.