South Africa's youth leaving retirement saving too late

Latest government statistics for the first quarter of 2010 show that nearly 50% of South Africans between the ages of 16-24 and 28% of those aged between 25-34 are unemployed. According to Seelan Gobalsamy, MD of Old Mutual Corporate, these statistics, combined with research findings by Old Mutual show that less than a third of South Africa’s youth have any kind of retirement savings vehicle in place. This could have a devastating knock-on effect for the ability of young South Africans to retire comfortably in the decades to come.

Gobalsamy says that contributions made to a retirement fund early in one’s working life are the most important. “While retirement may seem a long way away to someone in their twenties, it is vital that people begin saving as early as possible. Basically, thanks to the power of compound interest, the longer your money is invested, the more time it has to grow.” He says that waiting even a few years before starting to save for retirement can have a massive impact on your final retirement savings.

Gobalsamy says another factor that impacts on younger workers is that they are often excluded from the benefits that many other workers take for granted. “Young people are more likely to have jobs without health and retirement benefits as they are often given entry level jobs and only accrue these forms of benefits in later years.”

However, he says that even when they are given the opportunity to access a retirement fund, many pass on the opportunity as they feel they would rather start at a later stage when they can more easily afford payments.

According to a recent Old Mutual survey, 53% of working South Africans have access to retirement savings vehicles such as pension or provident funds, yet just 28% of the under-30’s are members of these funds. “People need to start viewing the idea of saving for retirement as a necessary expense such as insurance or fuel.”

Our tax system does not sufficiently incentivise late-starters to save more for retirement, and many retirement funds still don’t allow flexible contributions,” says Gobalsamy. “Considering the savings position of many South Africans under 30, a review of this stance is probably long overdue.”

Recent industry research indicates that people are retiring around age 61 with only 20 years worth of contributions to retirement funds, as they cash in their retirement savings when they change jobs. At an average contribution rate of 11% of salary - at retirement - most pensioners receive below 30 % of their last monthly salary as a monthly income.

“A calculation by Old Mutual Actuaries and Consultants (OMAC) show that people who start contributing again to a retirement fund at age 32, will typically have 29% less savings at retirement age, compared with someone who started saving for retirement at age 21. If you start over at age 37, you could have up to 42% less retirement savings than someone who never cashed in their retirement savings when they changed jobs”

In addition, results from the Old Mutual Retirement Monitor Survey 2010, confirm that 23% of pensioners currently receive financial assistance from others. This assistance makes up almost a quarter of their income.

Although South Africa's life expectancy has fallen to below 50 because of HIV/Aids, statistics show that once a person has reached the age of 60 the pandemic is no longer a major risk factor and longevity becomes the primary risk for having sufficient retirement funding. When you retire, you also need to take into consideration how much money you would need to spend on medical costs.

People therefore need to be aware of the fact that just contributing to your company pension fund might not provide you with sufficient savings at retirement if you have taken some of your retirement savings in cash during any stage of your working life.

Old Mutual research also indicates that if a person retires at age 65, while contributing 11% of their monthly salary (employer contribution included) for a period of 40 years, they will receive a monthly income from their retirement savings equal to 79% of their last monthly salary, which should be sufficient to retire comfortably.

Gobalsamy added that “poor savings habits coupled with the high rate of unemployment will definitely have an enormously negative effect on South African pensioners in future. By the time today’s younger generation retires; their retirement savings will most likely be insufficient to meet their needs”.