South Africans face huge retirement risks
The global financial crisis that played out in 2008 and 9 has haunted economies though 2010. As we enter the second decade of the 21st Century we have a chance to reflect on the “good” that stemmed from the virtual financial system meltdown. From a monetary and fiscal policy perspective the world emerged united in addressing credit liquidity issues. From a financial services perspective banks and other lenders have tightened credit policy considerably. And on a personal level, individuals have been forced to take a long hard look at their personal financial situations.
There’s no better way to consider financial wellbeing than to delve into the state of a nation’s savings. According to Rian Le Roux, chief economist at Old Mutual Investment Group SA (Omigsa), South Africa saves way too little. He was presenting on the findings of the latest Old Mutual Savings Monitor, November 2010.
A post-crisis world
Post-crisis saving is influenced by a number of factors. The one with the most significant impact on individual savers is undoubtedly the expectation of lower investment returns over the next five to 10 years. Says Le Roux: “South Africa will have to face up to the reality of lower returns.” Local retirees are already experiencing sever income constraints as the Reserve Bank puts the finishing touches to the deepest round of interest rate cuts we’ve seen in decades. If – as various stakeholders in the domestic economy demand – they cut rates again early in 2011 the situation (for those relying on interest for their income) will worsen.
Another problem for future retirees is that developed world economies are seriously reconsidering their pension fund commitments. As a result countries throughout the European Union are considering extending the retirement age as the quickest and simplest solution to reducing their social obligations. It’s not going down well – with the youth in France and Greece protesting their proposals vehemently.
The reality is fewer people will retire with sufficient income. “Dependency ratios will increase,” says Le Roux. And South Africa won’t escape the trend.
Huge risks to individual retirement plans
Concerns around the economy aside, South Africans run huge risks in retirement. Le Roux mentioned five main causes for concern – the first being poor investment decisions. The last minute “fear and greed” decisions taken by local savers in an attempt to bolster their retirement pot, amounts to little more than gambling. Thousands of local investors have lost everything by participating in so-called investment opportunities offering “way above market” returns.
The second risk to local retirement savers is that of under providing. After the shift to defined contribution many savers are providing far less than they need for a comfortable retirement – while even the “bullet proof” defined benefit funds could proven inadequate in the long run. There are three ways you can improve your replacement ratio: by increasing your monthly contribution, by beginning saving earlier or by earning higher real returns. Says Le Roux – making his third point – “Savings ratios must treble or quadruple for most people to provide sufficiently for retirement, but for some it’s already too late,”
Imagine you’d delayed saving for retirement in the hope you could make up any shortfall from investment return. Your hopes will have been dashed by the market performance (or lack thereof) over the past three years. Ironically savers are desperate for huge real return at a time when such returns seem more unlikely than ever! Le Roux’s fifth point is that investment in growth assets is crucial post-retirement too. There’s huge risk in not structuring your post-retirement portfolio correctly.
Take a sensible approach to investing
If you want a successful retirement you need to avoid emotional decisions, remain invested in an appropriate mix of growth assets for as long as possible and refrain from making “gut” decisions. The best recipe for long-term success is to make rational decisions and to shift your financial planning horizon from the short-term to at least 10 to 20 years hence.
Editor’s thoughts: Individuals who fail to make proper retirement provisions are faced with another problem in retirement. Because they’re worried about the size of their retirement pot they’re forced to invest more conservatively. And that’s why a massive 70% of cash flows into unit trusts still find its way to money market funds. Do you look far enough into the future when assisting clients with their financial planning needs? Add your comments below, or send them to [email protected]
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