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Longer life spans in SA present a challenge for retirement

15 May 2013 Windall Bekker, REZCO Investment Consulting

Improvements in the provision of healthcare available to many South Africans have led to an increase in the life expectancy for the average citizen in recent years. However, this reality also means that people need to save far more for their retirement th

Windall Bekker, Partner at REZCO Investment Consulting, “In very simple terms, if we assume that inflation remains constant at 6% per annum, we would need approximately R180 in 10 years just to maintain the current spending power of every R100 we currently have. This does not take into account that we are probably at the bottom of the interest rate cycle and that inflation is likely to increase over the next decade.”

Research published in medical journal The Lancet at the end of last year revealed that, between 2009 and 2012, the average life expectancy for South Africans had increased from 54 years to 60. Notably, this takes into account the impact that HIV/Aids has had on parts of the population. Bekker comments, “This number does not fully account for longevity risk, however, as retirement funding generally impacts on higher educated and healthier individuals who tend to live much longer than the national average.”

Bekker says that while this is very positive news, it does present challenges for people in terms of retirement funding. “People starting to enter the workforce now will need to fund at least a further 10 years into their retirement. Furthermore, as healthcare technology advances, longevity can be increased but at a cost that is much higher than the overall inflation figure, putting further pressure on retirement funding.

“This presents a serious challenge, as we already have a huge problem in South Africa with regards to the level of retirement savings being made on an individual basis. One of the most common mistakes is that people do not plan adequately, instead expecting the retirement fund that they contribute towards to be sufficient to assist them with their final retirement needs.”

Bekker says it is a known fact that even those South Africans who do opt to save often do not make sufficient provision, often retiring with very low ‘replacement ratios’ when they exit their retirement fund. A replacement ratio is a percentage measurement comparing someone’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,” says Bekker.

He says an 80% replacement ratio essentially means that a consumer would receive R80 monthly retirement income for every R100 that was earned (monthly) before retirement. “Some of the main causes of the low replacement ratios in South Africa include low preservation – in other words, when people change employment, they cash in some or all of their retirement benefit saved to date; low contribution rates as a result of low wages, where consumers have little or no disposable income; high investment fees and low returns on complex retirement products.”

Bekker says that if a consumer’s replacement ratio is below the desired level, they have some options available, such as: increasing the contributions to their retirement fund; retiring 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.

He offers other practical advice as follows:

• Start saving earlier - consume less and save more. This means monthly contributions from your salary as well as big lump sum payments, bonuses, an inheritance and so on.

• Try to extend your working life by getting skills that are in demand irrespective of your age, as most employers are very hesitant to extend retirement age unless employees have a specialised skills set that is in demand.

• Invest wisely and take an interest in your investments on a regular basis. Make sure your investment product suits your needs in terms of your investment objectives. Make sure you understand what you are investing in and what fees are applicable.

“Consumers should make sure that they receive expert financial and investment planning advice to be certain of understanding their current replacement ratio and the appropriateness of their investment objective. They need to create a realistic plan, while they are still working, that will provide some security when they retire,” Bekker concludes.

Comments

Added by Fergus, 16 May 2013
Sage advice from Bekker. Saving has become a hobby wherein I monitor all of my savings mechansims on a monthly basis. Even if they are out of my control, I still watch them all. It encourages me to save and invest more. My only regret is that I did not invest more earlier. My children will be be "educated" and encouraged from a young age.
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