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Safeguarding your clients against retirement Armageddon

09 June 2022 Gareth Stokes

The latest in a long line of annual retirement tracking studies shows that six-in-10 South Africans expect to rely on their children for financial support through their golden years, while one-in-three have not bothered to do any retirement funding calculations at all. These and other statistics shared in the Just Retirement Insights 2022 confirm that most of us face a ticking retirement time-bomb, that only a professional financial adviser can defuse.

Will Janey and Joey have to get you through?

As this writer paged through the 36-page study report, he was reminded of his university induction many, many years ago. At the time the head of department lined us all up, and told us to look left and right, predicting that by the end of our fourth, these two ‘faces’ would have dropped out of the programme. I.e. one in three who started the degree would not make it to graduation … and how right he was! In the retirement funding context: get in line, look left and right, and memorise the ‘faces’ who will have to depend financially on their little Jane or Joey deep into their 70s, 80s and 90s. 

The fact that so many of us are in for an uncomfortable retirement is bad news for government and our heirs, but great news for the thousands of financial advisers and planners who earn a living from helping people navigate their life financial plans. Think about this statement for a moment: you offer products and services that address a need, and this need is acknowledged by the market you hope to sell your ‘wares’ to. According to Just SA, having an income in retirement that continues for life has been “the top priority across four consecutive surveys conducted since 2018”. And this cry for help from retirement savers is best responded to by advisers and planners. 

Uncertainty is blighting SA’s financial planning landscape

One of the independent retirement tracking study’s key observations was that savers are seeking certainty, though there does seem to have been an easing off in certain areas as the country slowly emerge from the pandemic cloud. “When so many factors are uncertain and unpredictable, it is natural to seek out security,” said Deane Moore, CEO at Just SA. “This might explain why the preference for certainty that we saw established during the COVID-19 crisis seems to have become a more permanent shift, as the world moves through another set of crises”. Locally, retirement savers have to worry about crime, load-shedding, municipal collapse, soaring petrol prices, staggering unemployment and a litany of other issues before they even get to turn their attention to savings. 

The financial planning focussed slides contained in the 2022 survey report were full of contradictions. For example, 63% of survey respondents strongly agreed that it was important to set their financial planning objectives based on their retirement needs, yet only three-in-10 said they did, or intended to, use the services of a professional financial adviser and the same number had not bothered to do any retirement funding calculations. Another bizarre finding was that 56% admitted to being financially impacted by lockdown and 45% had dipped into their retirement savings to survive the hardship, yet the number who strongly agreed that it necessary to plan ahead for financial security had dropped from 74% in 2020 to just 52%. 

The pandemic uncertainty has also wreaked havoc on retirement savers’ risk appetites. It seems that most respondents lent towards ‘disagree’ when confronted with the statement ‘I do not mind taking risks with my money for savings or investment purposes’. The pre-Covid surveys showed that between 40%and 46% were risk averse insofar their savings activities, which number unsurprisingly jumped to 65% in 2020, and receded to 52% in 2022. According to Just SA, there were three retirement themes that emerged from this year’s online and telephonic survey of over 380 pre-retirees and retirees between the ages of 50 and 85, namely financial planning, financial endurance and financial certainty. 

Mismatches in actual versus expected mortality

The financial endurance theme explored mismatches between how many years survey respondents expected to spend in retirement versus what their experience was likely to be. Here follows another of life’s wonderful contradictions, with more than 90% of respondents indicating their health was ‘better than average’ juxtaposed with every respondent expecting to die well before the average life expectancy for their birth year. Getting life expectancy wrong means that most survey respondents were saving for retirement based on spending 20 years in retirement versus the reality of 25 years or longer. And this has the potential to worsen retirement outcomes. 

Worryingly, when asked who they would turn to should their retirement money run out in future, 57% of respondents expect to call on their children or grandchildren and 42% their siblings or other family members. As with most surveys of this type, respondents were unclear on how much they needed to save for a sustainable retirement. For example, respondents indicated they had saved between two and 10 times their gross annual salaries when the amount required is closer to  20 times. “The overwhelming majority acknowledged that they would need to change their lifestyles if investment markets fall by more than 10%,” noted the report. This is especially true for those who go the living annuity route to provide an income through retirement. 

The report is worth a look for its interesting case study on using annuities to provide a steady income during retirement, with the preference for a combination of guaranteed life annuity and living annuity products offered as a sensible way to go. Financial advisers and planners will know that the life annuity converts their client’s accumulated retirement savings into a regular income for rest-of-life whereas a living annuity offers flexible drawdown rates from an investment that is linked to the vagaries of the financial markets. All else being equal, Just SA makes a compelling case for a blended annuity to achieve longevity protection, inflation protection and volatility protection while offering the retiree a certain level of flexibility. 

The value of financial advice

Since most of our readers are involved in financial or risk advice, we relish any pro-advice punt. Just Retirement Insights 2022 concludes that it is worth considering advice from a qualified financial adviser. The suggest that South Africa’s retirement savers seek professional financial advice if they need help understanding their choices under the life, living and blended annuity product universe; if they want to get to grips with their personal financial circumstances; and if they need advice on how retirement savings should fit in with other savings and investments, among other advice needs. 

Positive financial advice conclusions aside, Moore found the overall findings of the 2022 tracking study concerning. “Not only does the study reveal a continued lack of confidence among retirees about their financial future, but also a disconnect between their expectations and the reality of retirement,” he said. “If we could share one clear message with South African pensioners, it would be that it is possible to secure an income for life so that you never feel you are a burden on your children”. 

Writer’s thoughts:
South Africa’s financial advisers and planners should take a keen interest in consumer-facing retirement surveys, because these get into the issues facing potential future clients. It is easy for advice practices to get mired in the issues facing clients, who are all already ‘locked in’ to your product and service offering, while forgetting about the market of unserved savers who could really benefit from your help. Do you find the stats shared by consumer-facing retirement surveys useful in your practice? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

 

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