Mind the gap – a practical guide to a healthy retirement

Many South Africans generally find themselves wanting when it comes to retirement funding. In order to overcome the prevailing culture of low rates of savings and a lack of preservation that contribute to the poor retirement situation of South Africa, inv

This is according to Vuyolwethu Nogantshi, Head of Institutional and Consulting at Nedgroup Investments, who says that the greatest barriers to South Africans achieving a comfortable retirement are poor preservation and delayed savings. “The unemployment problem in South Africa means that employees who lose their jobs may remain unemployed for extended periods of time. At a time like this, many people succumb to withdrawing their retirement savings due to the relatively large sum it represents,” he says.

In the current environment, as costs of living increase steadily, many people defer savings for current consumption. According to Nogantshi, unless people know exactly how much money they need to save, it is difficult to visualise the effect that withdrawals and non-contribution will have on the long-term retirement savings.

He says the recommended industry measure to calculate how much money one will require in retirement is the replacement ratio - which compares one’s income immediately prior to retirement against one’s income after retirement.

“Most practitioners suggest a replacement ratio of between 60% and 75%. However, again individual circumstances are more important to determining what comfort in the context of this measure really means. What people need to be aware of is what drives this measure and how to maximise their result at retirement,” he says.

Nogantshi refers to a paper by the Actuarial Society of South Africa, which highlighted seven key factors that drive the replacement ratio of an individual through the savings cycle. He says individuals need to take accountability for their own retirement and understand what behaviours will lead them to a positive result. “Knowing how each factor affects their replacement ratio is essential to equipping clients for a better retirement,” he says.

1. Contributions to savings

“People need to ensure that they save an appropriate amount given their current income and objectives The more individuals save per month, the more they will have available to meet their lifestyle needs at retirement,” says Nogantshi.

2. How long one saves

“The earlier one starts saving, the greater the amount of savings one will have. The power of compounding comes through with longer savings periods. Savings should ideally start as soon as one secures employment and an income,” he says.

3. Investment returns

Nogantshi adds that investors must ensure that they have an appropriate investment strategy or plan given their individual circumstances. The better the investment returns they enjoy, the better their savings will grow.

4. Costs

“Costs of saving for retirement, such as tax, will cause a drag on one’s replacement ratio. This is a concern that National Treasury has also highlighted and it is important that clients aim to minimise their costs in saving,” he says.

Nogantshi continues that occupational plans are a tax-efficient way to saving as they have access to institutional pricing for risk and investment products, which is usually better pricing than in the retail environment. There are also tax-efficient private arrangements that individuals can use to supplement savings.

5. Non-preservation

The non-preservation of retirement savings on employment changes has a significant impact on replacement ratios. “Essentially, you reset your period of savings to zero,” he says.

6. Annuity factors

According to Nogantshi, the price of the annuity that one can purchase at retirement has a big impact on their replacement ratio. As individuals grow towards retirement, changes in how long people live, interest rates and other factors will affect this pricing. Therefore, it is important to be aware of such changes as early interventions can have a marked impact later.

7. Salary progression

As part of the equation that determines the replacement ratio, salary is an important driver. “The higher one’s salary is, the more they need to save to replace it at retirement. Clients should aim to keep a constant savings level as a proportion of salary, as this is key towards securing a comfortable retirement,” concludes Nogantshi.