The retirement industry in South Africa is in a dire state. That our citizens are struggling, and will continue to struggle to save for and reach a successful retirement, is unfortunately an undeniable fact.
This seems like a very negative way to start an article about retirement planning. However, when scrolling through the personal finance pages of any newspaper or magazine, it is clear to see to all and sundry that there is a very real panic amongst us. Questions, articles and campaigns all focussed on how to get your hands on that golden retirement egg. It is one of the most hotly discussed financial planning issues in South Africa. However, the question still remains. Why are we struggling to save enough for retirement?
The statistics speak for themselves:
– Only 29% of retirees in South Africa can maintain their standard of living after retirement
– 1 in 5 pensioners have to supplement their retirement income with part time work
– 38.4% of retirees have depleted their retirement funds very early on in retirement
– It takes an average of 2.42 years for retirees to spend all their capital accumulated over their working lives
– More than 70% of individuals do not consult a professional before retirement
So, after taking in all the statistics and numbers, wherein lies the problem? In my mind the key areas for concern are as follows:
1. Not contributing enough
2. Starting to save for retirement too late
3. Non-preservation of benefits
4. Insufficient investment growth, ie. Incorrect fund choices
5. Retiring too soon
6. Still having to repay debt at retirement
A company in South Africa recently calculated that in order for a person to retire at a 75% pension, ie. 75% of final salary being earned in retirement, he/she must contribute:
– 12.5% of income to a retirement product
– For 40 years, and
– earn investment growth of CPI + 5.5% in the fund
The above-mentioned formula for a successful retirement can be directly attributed to the areas of concern I mentioned earlier. For the purposes of this first article on retirement, I will focus on the first part of the formula, namely the income value (pension value) at retirement.
To think about retirement is quite difficult because of the timelines involved. You simply cannot imagine how your life would be in 40+ years, and this makes it difficult to plan for. Also, there is a disconnect between how a retirement fund lump sum value will translate into an income and what that income will be in today’s monetary value. However, difficult as it sounds, it is not that difficult to plan for.
Professional financial planning places a lot of emphasis on retirement planning due to the massive importance of it being a long term goal. When I do retirement planning for my clients, the main focus is the discussion surrounding the desired income at retirement in today’s monetary value. The reason for this is that the capital amount available at retirement is not only a culmination of a lifetime’s worth of diligent saving, but predominantly a value that must translate into income generation. The desired income from retirement age until an estimated mortality age must be quantified into a lump sum value at a chosen retirement age. That lump sum must then be used to provide you with your desired income.
The desired income level is therefore the most important factor when planning for retirement and the biggest driver when calculating the required lump sum.
The discussion surrounding a desired income is one that is best achieved when using a professional financial adviser. He will be able to guide your thinking with regards to income levels and how this income will be affected by your circumstances. I will delve deeper into issues and decisions in the retirement articles to follow as there is a lot of information to discuss. However, if you feel that you need guidance or assistance, please feel free to contact me as soon as possible.
Schonbergtrust Financial Brokers
Tel: +27 (0)21 914 1047
Returning to South Africa — Financial Planning explained