Asking the hard questions on the road to retirement

Rowan Burger, Executive: Large Corporate Segment at Momentum

Are we having the most relevant discussions with our clients when it comes to saving towards retirement? There is no doubt that any discussion regarding this topic will be seen as helpful advice, but there are some discussions which are more relevant than others.

This is especially true in an age where longevity is having a significant impact on retirement saving. When your client has no idea what their life expectancy is, Rowan Burger, Executive: Large Corporate Segment at Momentum, feels that the best place to start wholesome retirement planning is at the beginning.

A popular misconception

When a person starts their working life, they are encouraged to allocate 15% of their salary towards retirement planning. This is a safe number; however, there is a grey area as to which salary this 15% applies to.

A person typically receives a pensionable salary, which is regarded as their basic salary and makes up 80% of a person’s salary. Added to this pensionable salary are additional benefits such as traveling allowances, commissions in some cases and other benefits. This makes up the further 20% of the salary.

“There is a misconception that a person needs to allocate 15% of their pensionable salary towards retirement. The difference between allocating 15% of 80% of your salary and 15% of 100% of your salary can be significant,” says Burger.

The longevity challenge

We all know that longevity is becoming a challenge for people who are planning for retirement, but how can we quantify this?

Burger points out that according to the US Bureau of Labour Statistics, the common retirement age in the 1950s was 70 and life expectancy in retirement was seven years. “In 2000, the retirement age reduced to 63 but life expectancy has increased to 82, nearly tripling the period a person would spend in retirement. For 2015 both retirement age and longevity have moved out two years. We therefore have a system conceptually designed to cater for a handful of years that now requires a significant amount of funding from individuals and the state over a long period of time,” says Burger.

This poses a significant challenge, and employers have passed these risks to their employees in defined contribution funds. Members with inadequate savings purchase a living annuity hoping to die before their money runs out. Burger points out that at present there are few controls governing these products.

“National Treasury have proposed that clients should be invested in a prudent manner and levels at which drawings take place should reflect this. As such, clients should at least aim to cater for a lifetime to remove the reality that the South African population currently faces where only 6% of the population can retire comfortably,” says Burger. Most client plans consider life to 80 or 85, forgetting that you really don’t want to plan to be average for this risk.

Shifting the mindset

The only way to overcome this challenge is to change our mindset on retirement.

Burger points out that in the last century, life expectancy has been increasing by three months for each year of birth. This means that at this rate, a Child born today has a life expectancy of 30 months longer than an equivalent ten year old.

“This means workers today need to prepare and consider what the appropriate retirement age is. It should also be driven primarily by when you can afford to retire rather than by a specific age. For many it means consider different careers over a working lifetime,” says Burger.

Retire later

There is also a strong case being made for clients to consider retiring at a later age as we know higher contributions are not affordable. Because of the rise of the internet and technology, 25% of the jobs in the world today did not exist ten years ago. This means that skills that one acquires when working for a company can be transferred to be used later in life.

“There is also significant value in looking at bringing retirees into a company on a part-time/consultant basis. This means that they are not working five days a week for the company. Just because a person reaches 65, does not mean that they lose the skills that they have acquired for over 40 years,” says Burger.

By delaying retirement, not only do you get an additional year of investment return and additional contribution, but the period over which you are expected to draw down on your savings reduces by a year too.

Editor’s Thoughts:
At the end of it all, your clients want to be able to retire with the satisfaction that they can look at their retirement fund and say that 40 years of sacrifice was worth it in the end. But we need to realise that we cannot be having the same conversations with clients now that we were having 10 or 15 years ago. The focus of your discussions may need to shift to benefit your clients. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.