The harsh reality of retirement
Retirement savers are stuck between a rock and a hard place. Nowhere is this comment better illustrated than in post-crisis Europe, where savers have been hit by the double-edged sword of record low interest rates and plummeting equity markets. The crisis and subsequent recession has hit sentiment among European retirement savers. In fact, the Aon Consulting European Employee Benefits Benchmark – a survey among more than 7 500 workers from across Belgium, Denmark, France, Germany, Ireland, The Netherlands, Norway, Spain, Switzerland and the UK – concludes 55% of Europeans are ready to delay their retirement savings!
Levels of pessimism vary from country to country – with the most pessimistic workers in France (74%) and Germany (73%). The Irish (65%), Swiss (67%) and British (60%) aren’t too far behind. And more than 80% of workers in Ireland and Britain believe they will have to delay retirement by at least two years. The latest survey shows a significant sentiment shift from previous years, where one in three European workers indicated they would rather retire earlier with less income, opposing moves by various governments to extend the minimum retirement age.
Understanding negative sentiment
Why the pessimism? The financial crisis and subsequent recession has raised awareness of the link between markets and retirement savings among ordinary citizens. Thanks to the prominence of consumer journalism through the recession, Joe Average knows his pension fund has taken a hit. Oliver Rowlands, head of retirement, Europe Middle East and Africa, at Aon Consulting observes: “Recent events have shown the value of defined contribution pension funds can go down sharply in a recession, which has come as a shock to many people used to gold-plated defined benefit pensions and generous state benefits.”
The shift from defined benefit to defined contribution has hit individual savers hard. As a result of this change the risk associated with retirement saving has shifted from corporations and governments to land squarely in the hands of the individual. “People are realising they need to take an active interest [in their retirement savings plan, including taking steps, such as delaying retirement, to make sure they are financially secure,” says Rowlands.
Apart from the usual advice Rowlands suggests shopping around when purchasing annuities. “The price of annuities can shift from day to day and vary significantly depending on the provider, so shopping around is a must, in order to get the most out of a lifetime’s worth of saving,” he says. South Africans have had loads of time to deal with the defined benefit concept.
Planning for a successful retirement
We already know that saving for retirement is a long-term undertaking! And we also know that to retire comfortable we must achieve a replacement ratio – retirement salary expressed as a percentage of your final salary – of 75% or more by age 65. The retirement recipe is available from any of South Africa’s professional financial advisers.
Ingredient number one is to start saving for retirement as soon as possible. Compound interest – which is the interest earned on interest – needs time to work for you. For example, a person saving from age 35 and retiring at 65 will have only two thirds of capital available to a person who started saving at age 25. You should contribute 15% of your gross annual retirement salary for a full 40 years! The second ingredient for a successful retirement is to preserve, preserve, and preserve! Resist the temptation to use your retirement benefits for non-retirement purposes when changing jobs, whether due to job hopping or retrenchment. If you religiously save 15% of your gross salary over 40-years you should comfortably achieve an 80% replacement ratio.
If you job hop three times – and preserve only half of your benefits each time – you will achieve closer to 30%! And the final ingredient is to seek out the services of a professional financial advisor. A trusted professional can assist you with the important financial decisions leading up to and during your retirement – ensuring your mix of retirement savings instruments correctly reflects your life stage at all times.
Editor’s thoughts: The investment professionals say you must save consistently over 40-years to ensure financial security upon retirement. But it seems financial shocks like the recent sub-prime crisis can scupper the best laid plans. Have recent stock market performances forced any of your clients to reassess their retirement date? Add your comment below, or send it to [email protected]
