Every month, you diligently stash money away in your pension fund, thinking everything will be hunky-dory when you finally put your feet up to retire. Think again. It’s not nearly enough – if you’re not planning wisely now, you’ll be doomed to work until you’re 80.
No-one wants to picture themselves as old. But, for a moment, imagine yourself as an elderly citizen and still working. Hell no! Not only that, but many of us may very well surpass 100 because of medical advancements, which, unless accompanied by an overhaul including new bones and a few key organs, seems terrifying.
So, rather, consider saving prudently as freedom from enslavement. Thankfully, there are ways to avoid keeping your nose to the grindstone for the best of your golden years.
A study by Sanlam Corporate, covering more than 300,000 Sanlam Umbrella Fund members, found that most South Africans retiring at 65 will only achieve a 25% replacement ratio – that’s the portion of their final salary they’ll receive as retirement income. That’s a far cry from the industry benchmark of 75% needed for a comfortable retirement.
“Most people will need to work an additional 15 years to achieve financial security in retirement,” says Sanlam Corporate CEO Kanyisa Mkhize. Sanlam’s data assumes a 9.25% return, 5.25% inflation, a 35-year savings period, and a starting age of 30.
He advises individuals to consider strategies to ensure their employability “well into their 70s” while managing their health and constantly improving their skills to “remain competitive in the job market”.
Factor in your bonuses
Elke Brink, a wealth adviser for PSG Wealth, tells Currency that investors make several mistakes when saving for retirement, the biggest being setting aside too little to secure an ideal retirement.
“Even if you have a really well-constructed portfolio that’s earning a proper return with a good fee structure, but you’re just simply saving too little, you’re not going to reach the goals you’re after,” she says. “People are saving 10% or 15% of their income when it should be closer to around 30%.”
Brink emphasises that investors should be increasing their contributions as their income grows. This includes factoring in regular bonuses, as these form part of total income.
Another one of the key reasons many investors fall short is that they fail to account for their true inflation rate, which rises much faster than the average basket of goods used by Stats SA to calculate official price gains. They must also consider what lifestyle they want and remember that medical aid prices climb faster than the consumer price index.
For instance, an index built by portfolio manager Johann Bierman called the “braaibroodjie index”, shows that prices have increased by 9.8% a year over the past five years, compared with the official rate of 4.9% per year. Over the same period, the JSE all share index delivered 7.9% per year. The braaibroodjie index tracks the price of salt, pepper, tomatoes, chutney, margarine, white bread, cheddar cheese and onions.
Invest in growth assets
To preserve capital while drawing an income, returns must outpace inflation. This requires a well-diversified portfolio that manages risk and maintains consistent returns. Typically, income is drawn from cash rather than equities to better navigate market fluctuations and tax implications.
Many investors tend to invest too conservatively because they don’t always understand the concept of risk versus volatility, and, as a result, aren’t getting the returns they need, Brink explains. While investors want to protect their capital by seeking the safety of cash or low-yielding bonds, these often don’t keep pace with inflation, which means the value of their savings is being eroded.
Shares are growth assets and have a vital role to play in a portfolio, especially due to their compounding effect over time, even if they have their ups and downs, she adds.
Another important factor is choosing the right investment platform – one with low administration and commission fees to avoid unnecessary costs eating into returns.
Tax efficiency is crucial and should consist of more than one type of product, the PSG adviser says. If all your retirement savings go into a living annuity, then pay-as-you-earn scales will kick in and hurt you, Brink explains.
With smart planning, the outcome can be very different. For example, investors can put away as much as 27.5% (up to R350,000) of their annual salary in a retirement annuity a year without being taxed on their contributions.
“You need to be planning for actual inflation and emergencies,” Brink says. “Like what to do if you suddenly need R100,000 to repair a car. Do you have that provision?”
Corporates also have a responsibility
For Sanlam Corporate’s Mkhize, the impact of poor retirement savings goes beyond individuals – it also puts pressure on businesses and the economy. What’s more, the government faces a “challenging paradox”: should it support retirees who have some savings, even though those funds are often not enough for a comfortable retirement?
Employers also have a challenge. They need to manage an ageing workforce while ensuring younger employees get opportunities, all while meeting transformation goals – especially in a country where youth unemployment sits at 45.5%.
To address this, companies can:
- Implement automatic contribution increases tied to salary growth, ensuring higher savings without reducing take-home pay.
- Expand employer-matching contributions to encourage greater savings. Higher matching thresholds or more generous ratios provide employees with an effective salary boost while leveraging tax benefits.
- Improve access to financial advice and education, helping employees make informed investment decisions.
“We have a responsibility to help South Africans retire with dignity, not decades past their prime,” says Mkhize. “This is not just about individual savings behaviour. It’s about creating a sustainable system that works for all South Africans across generations.”
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