South African retirees choke on the reality pill
Statistics paint a bleak picture for South Africa’s growing retirement-age population. Tom Linklater, Wealth Manager at FNB Private Clients, in his article titled Retirement Reality, is the latest to further the debate. He estimates only 3% of South Africans will retire financially independent. “This financial status is normally a reflection of the financial planning implemented through an individual’s income earning years,” says Linklater. The country’s abysmal savings rate compounds matters further and even those who plan for retirement will be taken aback by the slip in living standards required to make their nest eggs last.
Changes in the retirement environment can be blamed for some of today’s problems. Many employees became victims of the employer-driven shift from defined benefits to defined contribution pension schemes. Instead of receiving an employer-guaranteed pension based on final annual remuneration, these individuals switched to a market-linked return on contributions to their pension fund. This had disastrous consequences for some! “A further daunting reality is that if an investor has been on an employer-sponsored pension fund they will still need to make up between 30% and 70% of their retirement income through personal savings generated during their income earning years,” says Linklater. Recession places an extreme burden on individuals trying to achieve such savings objectives.
Six trends dominating the retirement landscape
There are a number of trends dominating the modern retirement fund environment. The first trend is people are retiring younger. “The reason for this is a bit abstract,” writes Linklater. He observes that proper financial planning makes the retirement decision easier. There are far too many people making inadequate provision for their retirement, but those who do plan have the confidence to retire earlier than their peers.
Economic policy decisions have impacted heavily on South Africa’s retirement environment in recent years. The transformation process – driven by Black Economic Empowerment and Employment Equity – forced many employees to take early retirement. The sad reality is many of these early retirees chose to invest part of their retirement savings in business ventures – at unacceptable levels of risk for their lifestyle stage.
The third trend Linklater discusses is the blurring of lines between retirement and retrenchment. “Often, retrenchment becomes retirement when retrenched individuals are unable to find employment,” he says. Such individuals eventually give up their search for work, becoming retirees by definition. Retrenched individuals face a number of difficult decisions when it comes to re-investing their pension benefits. All too often they choose to withdraw their benefits with dire long-term consequences.
The fourth trend is the move away from traditional life assurance retirement products to the unit trusts. “Collective Investments, as a proxy for general saving had been growing massively over the last decade,” says Linklater. He cautions, however, that this development doesn’t indicate an increase in overall savings, but rather a shift from one investment vehicle to another.
Trends five and six are interlinked. South Africa’s population and demographics are changing radically due to the impact of HIV/Aids among others. Life expectancy has been so radically lowered by the ravages of this disease that some industry experts suggest death benefits – and not retirement funding – should be the focus of any interim national savings solution.
Asking the right questions
A financial adviser has to guide his client through the retirement planning process. Part of this guidance involves asking the ‘right’ questions. We found a great example of the importance of asking the ‘right’ question in an excerpt printed in the book: Buffett – The making of an American capitalist.
A stranger arrived in a small town. Wanting to get acquainted with the other villagers he approached an old-timer with a kind of mean-looking German shepherd. He looked at the dog a little tentatively and said, “Does this dog bite?” The old-timer replied “Nope.” So the stranger reached down to pet the dog only to almost lose his arm as it lunged at him. Retrieving his shredded coat the stranger turned to the old-timer and said “I thought you said this dog doesn’t bite!” To which the guy shrugs “It’s not my dog.”
Retirement planning requires your answers to any number of questions. Although “When would you like to retire?” remains an appropriate question the focus should always be on when you can afford to retire! A good starting point for a financially independent retirement is to establish an effective budget by accurately detailing your expenditures and disposable income. Once you establish your expected per-annum retirement expenses – and the lump sum you will require to retire comfortably – you should adjust the amount for “lifestyle; children; date of retirement; inflation; assets and the influence of taxation.” Armed with this information your final task is to follow the roadmap set out for you by your financial planner.
Editor’s thoughts: Planning for retirement is a daunting task. You have to set, implement and achieve financial targets over periods spanning decades. Your best weapon in the fight for an adequate retirement income is to start early – the sooner you begin saving the less of your monthly salary you need to squirrel away! Would you be satisfied if you retired on 76% of your final take-home salary? Add your comments below, or send them to gareth@fanews.co.za
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