No easy fix for SA’s retirement dilemma

Those hoping that South African savers would get their collective acts together and begin putting more away for retirement will find the 2022 South African Retirement Reality Report (RRR 2022) a hard pill to swallow. The fourth iteration of the annual report, compiled by 10x Investments, suggests that “the [retirement] outlook is worsening against most measures, as savers focus their attention on overcoming more immediate financial pressures”. What this means is that households are turning a blind eye to tomorrow’s retirement challenges in favour of balancing their budgets, today.

Unsatisfactory retirement outcomes to persist

Sadly, RRR 2022 confirms that the warnings issued over the last four years have had little effect, and that retirement still holds the prospect of deprivation and disempowerment for most South Africans. The trouble, according to 10x, is that by “focusing only on their near-term circumstances” households “may condemn themselves to living in perpetual crisis mode”. They further contend that a narrow focus on rising inflation and interest rates and the constrained job market detract from the long-term improvements to retirement outcomes that can be achieved with minor changes to saving and spending behaviours. 

Further context is necessary before poring over the report. First and foremost, the report is based on the 2022 Brand Atlas Survey which tracks and measures the lifestyles of the universe of 15.4 million economically active South Africans, further defined as individuals aged 16 and older, living in households with a monthly income of more than ZAR6 000,00. Secondly, the term ‘retirement plan’ refers to a considered and documented savings and investment strategy that will enable savers to accumulate enough money by the time they retire to maintain their standard of living in retirement. Thirdly, the results are ‘weighted’ to bring data in line with Unisa’s Bureau of Marketing Research Household Income and Expenditure report for 2019. Armed with this background information we can unpack some of the key findings in the 26-page document. 

Too many absent or vague retirement plans

The first chapter of RRR 2022 focuses on retirement plans by asking: “How do you feel about your current plan?” For 2022, 46% of those surveyed indicated they did not have a plan and 22% said that their plans were a bit vague. This compared to 23% who said they had a pretty good idea of what they were doing and only 8% who felt they were executing a well thought-through plan. Although there were minor improvements over 2021, “the bottom line is that 68% of people surveyed either have no retirement savings plan at all, or just a vague idea of one; translating into a lot of people who will probably be forced to rely on family and friends, or to try to eke out a living on South Africa’s older person’s grant [through retirement],” notes the report. The grant is currently set at ZAR1 980,00 per month from age 60, and ZAR2 000,00 for those older than 75. 

One of the many concerning revelations contained in the report is that almost half of those surveyed believe they can save for a comfortable retirement in 30 or fewer years. This contradicts the oft-repeated retirement mantra of saving 15% of gross annual income for 40-plus years, and to preserve these funds whenever changing jobs, for whatever reason. “It is recommended that workers save throughout their working life, an average of 40 years, keeping the required savings rate at a manageable 15% of earnings; skipping the first 10 years exacts a disproportionate punishment because money invested in the first years will grow the most,” writes 10x. They warn the 30-year misconception “is a significant contributing factor to SA’s retirement crisis” and advocate for “education and cultural change” to potentially unlock positive, system-wide change. 

Chapter two of the report focused on whether or not those with some form of retirement plan were making progress towards a sustainable retirement outcome. An alarming 62% of respondents partly or strongly agreed with the statement: “I worry about whether I will have enough money to live on after I retire”. A further 12% said they were unsure and only 8% strongly disagreed with the statement. There seems, however, a growing realisation among South Africans that they will have to generate additional income in retirement. 37% strongly agreed and 34% partly agreed with the statement: “I expect that I will need to keep earning some money after I retire”. 

Savers in for a rude awakening…

RRR 2022 further revealed that those who strongly disagreed with the aforementioned statement were among the higher income earners: “a mere 6% of those with annual household income of ZAR50 000,00 and above felt sure they would not have to keep earning after they retired”, the conclusion being that future financial dependence is not a function of income but rather of how we deal with that income. Despite the rather poor understanding of the time needed to save for a comfortable retirement, 60% of those surveyed reckoned they could “expect the same standard of living they enjoyed before retiring during retirement”. This writer concurs with the report’s intimation that many savers are in for a rude awakening after they retire. 

Savers, with help from financial advisers and planners, should familiarise themselves with key concepts relating to maintaining living standards in retirement. The first is to understand the idea of a replacement ratio, described as “the percentage of final salary required to preserve one’s lifestyle in retirement”. 10x suggests that 60% of final salary is an absolute minimum but acknowledges that the amount needed varies with individual circumstances and expectations at retirement. It is also important for savers to consider their basket of post-retirement expenses and make allowances for expenses that may increase at rates in excess of inflation. Imagine, for example, retiring on ZAR20 000,00 per month when your medical aid premium, which grows at inflation plus 4% or higher, amounts to ZAR4 000,00 per month in the first year. 

What about the value of advice?

This writer was perturbed to find no mention of the role of financial advisers and planners in preparing savers for, and guiding them through, retirement. Yes, it is possible for the layperson to plug a few numbers into an online retirement calculator to see how their DIY retirement plans are tracking; but nothing replaces the financial nous, decades of experience and product knowledge that professional financial advice practices bring to the table. Aside from growing the country’s woeful formal employment ‘net’, we believe that expanding access to and affordability of financial advice will prove the best medicine for SA’s retirement provisioning shortcomings. 

Writer’s thoughts:
I have seen precious little change in reported retirement outcomes following almost two decades covering insurance and investment topics, with most reports rehashing the same issues and warnings. My question to you, dear reader, is whether the lack of formal sector employment opportunities rather than households’ attitudes towards retirement saving is the real problem? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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