You can win the retirement savings battle by making the right investment decisions, a positive indicator that the retirement savings crisis is not all doom and gloom.
Some people are taking the challenge seriously and acting positively to turn the proverbial ship around on their savings status.
Data collected for the Old Mutual SA Retirement Gauge 2022 clearly shows that many South Africans are bucking the retirement savings crisis, says Andrew Davison, head of advice at Old Mutual Corporate Consultants (OMCC).
The Old Mutual SA Retirement Gauge 2022 takes an authoritative, in-depth look at the retirement savings habits and retirement readiness of South Africans belonging to umbrella funds through their employers’ occupational schemes. The gauge covered about 490 000 active members saving for retirement in retirement schemes set up by about 6 300 employers of all sizes and across all industries.
Despite the sample of people making the right decisions is small, Davison says they demonstrate that saving enough for retirement is entirely possible.
“We just need to get more people to do the same.”
The research found that four key elements distinguished people who saved enough for retirement from those who faced economic hardship. They saved for longer, stuck to the 15%+ savings rule, pushed back their retirement by whatever means possible and knew how much they needed.
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Saving for longer
People who had long service with an employer managed to accumulate up to eight times their annual salary, on average, after 35 years of service. However, only a small number of employees remain with the same employer for that long.
Many withdraw their pension or provident fund savings when they change jobs, pay the tax, spend the balance and start at a zero balance with their new employer. This leads to leakage from the system every time people change jobs.
Davison says people who change jobs should rather opt to preserve savings from different employers by leaving them in the same fund, transferring the money to the new employer’s fund or investing in a preservation fund or a retirement annuity in your own name.
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Sticking to the 15%+ savings rule
People who contributed above 15% of their salary to their retirement, have a much better chance of achieving a pension that is around 70% of their salary just before retirement. Encouragingly, a quarter of the members surveyed contribute at this level and a small group of super savers, 4% of provident and 2% of pension fund members, contribute 20% or more.
“It is quite common to hear people say they cannot afford to save. The reality is that if you are fortunate enough to have an income, the challenge is about figuring out how to balance your current needs and those that are either unforeseen, like emergencies, as well as those that are foreseen but potentially may seem far off, such as retirement,” Davison says.
Saving during your working years is about deferring some of your income and consumption to a period when you will no longer be working, he says. “It is the careful management and spreading of your own income over your lifetime, not just consuming whatever you get today on the same day.”
While nobody knows how long they might live or whether they will get to retirement, it is about planning for the future, no matter how uncertain, so that you are not left vulnerable if you do enjoy a long life.
Davison says the first step to be able to afford to save is to reduce your debt. “The same people who claim not to be able to save are often able to afford to pay installments on credit cards, personal loans or vehicle finance.”
When you get rid of these debts, you must use the installments you do not have to pay anymore to save and in this way, Davison says, the pain of paying interest is replaced by the benefit of earning interest, which can dramatically improve your financial situation.
If you save for your retirement, you must remember that any credit facility is damaging for your financial situation. Instead, delay the purchase, avoid the loan, save the equivalent of the loan repayment and then you can afford the purchase without the need for debt.
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Pushing back your retirement by whatever means possible
Employees with better retirement prospects do not retire before they reach 65. The Retirement Gauge found that just under half the members are working towards a retirement age of 65, with a third targeting 60.
Retiring at an earlier age, for example at 60 instead of 65, requires you to accumulate a higher multiple of salary in a shorter time to provide the same level of replacement ratio. Davison says someone saving from age 30 would need to save an extra 6% of their salary every month to be able to attain the same 70% replacement ratio at 60. “The question one should ask is not when you should retire but whether you can you afford to retire.”
Corporate employers usually prescribe a retirement age and some do not allow you to work after your turn 60, but Davison says retiring from the corporate does not mean you must start drawing a pension.
“Finding an alternative source of income, even if it is a contract position or a part-time can allow you to delay your retirement by deferment, where effectively you say that you would like your savings to be parked until you are ready to start to take a pension.”
He says the longer you derive this income the further your retirement savings will stretch when you are ready to ‘hang up your boots’ for good.
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Knowing how much you need
A common question for people approaching retirement is whether they have enough savings, but this is not an easy question to answer as everybody has different needs, family situations, dependants, tax, state of health, debt and annuities.
“A good starting point is to aim for a pension that is about 70% of the salary you were earning before you retired. This is on a gross basis, meaning before tax is deducted. To be able to afford a pension of this level, a 65-year-old male would need savings of about nine times their pre-retirement gross salary and a female about 8% more capital than that.”
“Employees should not feel that it is almost impossible to save for a comfortable retirement. Many people of all income levels are showing that it is possible. That does not mean it is easy. It takes careful planning, thinking about your future self and not just your current self and then having the discipline to stay the course. The financial decisions you make during your economically active years will determine the quality of life you are able to sustain in retirement,” Davison says.