Preserve your retirement savings for your golden years
If you gathered the country’s best known financial planners in a room they’d agree on one thing. South Africa is way behind the curve when it comes to saving for retirement. The product providers are aware of the problem too, repeating the “six in 100 wil
The recipe for successful retirement funding has been repeated as often as the retirement shortfall warning! I cannot remember a savings or retirement presentation over the past five years where the recipe for successful savings wasn’t trotted out. And here it is again: You need to save at least 15% of you gross income for 35-years (preferably longer) and preserve your collected retirement capital in an appropriate retirement savings vehicle each time you change jobs. If you do this – and provided your retirement capital generates market-related (in line with a benchmark retirement fund) returns – you should retire with a replacement ratio of 75%. In other words your first year salary in retirement will equal three quarters of your final gross salary and match inflation going forward.
Providing for all could be an unachievable pipedream
Can South Africa achieve a retirement nirvana where each of its citizens is provided for through retirement? National Treasury has taken the first step to supplement the current system of government old age grants by proposing a national social security system (NSSS). But the debate lost momentum through the recent economic slowdown and it seems priorities have shifted from NSSS to national health insurance (NHI) for now. We love the NSSS idea – but in a country where official unemployment tops 25% it cannot work! Government has no chance of securing comfortable retirements for all when private savings institutions battle to get six in 100 people to the same point!
The sensible solution would be for government to modify existing retirement funding legislation to make sure those who are part of the current private retirement savings system achieve their primary objectives. And because nobody likes to be forced to save, the first ‘soft’ intervention should be mandatory preservation (our view). Why? Because too many South Africans strip their pension funds each and every time they change jobs, whether they resign, are fired or retrenched! This tendency exhibited through the recession-led jobs massacre witnessed in our country recently. And the trend is likely to continue.
After shedding a million jobs through 2010 official employment statistics reveal that private sector job losses accelerated in the first quarter of 2011. The recently published Labour Force Survey for the first quarter of 2011 showed that while 42 000 jobs were added between January and March, the private sector lost an estimated 90 000 jobs. We’re looking at 90 000 individuals who had the opportunity to cash in their retirement savings!
Preservation, preservation, preservation
Pieter Cronje, Director at the Financial Intermediaries Association (FIA) and chair of its Employee Benefits Exco, says that it is essential not to cash in retirement savings to meet short terms needs, because the decision will significantly impact your ability to retire comfortably. “There is a huge temptation when one is retrenched to cash in the retirement savings built up with an employer to help pay for living costs and short term luxuries. However, one of the biggest contributors to a comfortable retirement is the effect of compound interest built up over time and cashing in now will significantly impact one’s ability to do so,” he says.
Cronje uses an example to drive this point home. Let’s say someone starts work with a salary of R5 000 per month and contributes 7.5% to a retirement fund, which their employer matches. This employee receives a 6% annual increase and works for 45-years before retirement. Most importantly, the individual makes no early withdrawals from his savings plan. At retirement this person would have a capital lump sum of approximately R5.5 million with which to ‘buy’ an income through his / her retirement. Had this person taken an early withdrawal of R550 000 after 20 years of service, the capital lump sum on retirement would have almost halved, to just R3 million! Preservation is the name of the game because dithering away your accumulated retirement cash each time you change jobs is financial suicide!
With more job cuts looming, Cronje says all stakeholders should work together to ensure that affected employees understand the importance of preservation and the significance of what cashing in savings today will mean for their future. Why don’t people preserve their savings? The Old Mutual Retirement Funds Survey 2010 determined that 53% of individuals who failed to preserve did so because of a lack of advice at the time of withdrawal. A frightening 62% of these persons admitted to not understanding the consequences of their decision! These figures illustrate the importance for anyone who does find him or herself out of work to contact their financial adviser before making any decision. “A qualified financial adviser is able to outline the preservation options available to their client and if necessary work out a new budget to accommodate their temporary reduction in income,” notes Cronje.
There are no short-term fixes in retirement...
Cronje continues: “Many people who cash in their retirement savings believe it is a short term fix and that they will either transfer the cash to a new vehicle at a later date or top-up their savings as soon as they are again employed. However, the reality is that this seldom happens and the money soon gets allocated for ‘essential’ purchases.” And once you fall behind it is impossible to catch up again. You cannot ‘fix’ a retirement saving shortfall overnight. The only way to improve the capital sum available to you on retirement is to begin saving earlier (from your first pay cheque), to save more each month, or to defer your retirement date beyond age 65. These steps are under your direct control. The only other way for your retirement capital to grow is through better than expected stock market returns… But be warned, even portfolios heavily weighted to equities will struggle to consistently deliver inflation plus 5%.
South Africans already show a disinclination to save adequately for retirement, which, combined with a propensity to cash in retirement savings when leaving or changing jobs, suggests we could be heading for a huge problem when these people finally do retire. The message is clear… Begin saving early, save as much as you can, and always preserve!
Editor’s thoughts: We can find some of the answers to the retirement savings conundrum by considering human emotion. It is difficult for people to pass up on today’s often spurious consumption in favour of tomorrow’s down to earth retirement. Will you preserve your retirement savings next time you ‘hop’ jobs? Please add your comment below, or send it to [email protected]
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