by Colin Horwitz
I hope that you experienced a fantastic festive season and that you are ready to tackle 2019 head on. I spent a few weeks in Cape Town recharging my batteries. A lot of that time was also used reflecting on 2018 with a huge question mark around investment returns for the year. Could we have done better? I really don’t know. The variables that kept popping up and which will continue for a while yet, affect our little economy on a continuous basis.
On arrival back in my office, I found the latest issue of Money Marketing lying on my chair. The front page headline hit me squarely between the eyes. It said “Retirement not a top financial priority in SA”. The article refers to the Alexander Forbes Annual Member Watch Survey and highlights a number of alarming statistics concerning retirement in South Africa.
This annual survey was started in 2006 and the 2018 survey uses a sample of just over 1million members belonging to 2030 employers. This, and I’m sure that you will agree with me, is an extremely fair sample of the fund member population in South Africa and as such the statistics coming out of the survey are extremely credible. Here are some that really stood out for me.
Average contribution to retirement fund is 12,17% of pensionable salary (which by the way may not be the total of the remuneration package).
Average annual pensionable salary was R227 428 and the average fund credit was R291 541. This in itself may not be too scary as the average South African changes jobs every 6 or 7 years and that’s a reasonable amount to accumulate in that time. Now that may still be ok if the average South African preserved their fund credit each time they job hopped. But no! The really scary part is that only 8,7% of people who left employment in 2018 preserved their fund credit. By way of an example of the cost of this, let’s consider the following. Mr. A who is 35 years old resigns from his current employment and decides to take his R291 541 and spend it. The first thing that will happen is that he will be donating R47 977 to SARS. The second thing that will happen is that within a short time nothing will be left of it. If he had preserved it, the full amount would have been invested and assuming he retires at an age of 63 and that he received a return of 10% per annum, he would have accumulated an amount of R4 204 310 toward his retirement. Would that not make a huge difference when you are at an age where most companies would not offer you employment? Speaking about retirement age, the survey shows that the average retirement age is 61.13 years old. Taking into consideration the fact that today most people live longer, means that savings will have to last longer.
This brings me to replacement values. This is the percentage received as an income generated by your retirement capital of your last income whilst working. The recommended amount (Retirement Industry Norm) that anyone should be targeting at retirement is an amount equal to 75% of final income before retirement. The survey shows that in 2018 the average actual replacement ratio was 28,8%. This means that our average person earning an annual income of R227 428 or R18 952 per month will now have to survive on R65 499 per annum or R5 458 per month.
So here are a few tips.
Understand what your retirement situation looks like. See a Professional Financial Planner. Get the necessary advice and assistance to ensure that the statistics above do not apply to you. Please don’t wait until you reach the ripe old age of 45 before doing this. Retirement planning should start happening the minute you earn your first salary.
Retiring early is not the answer. You can almost double your retirement ratio by working to 65 instead of 60. The math is simple. You will be receiving compounding growth on your retirement monies for a further 5 years plus you will still be earning and therefore contributing to your retirement nest egg for those extra 5 years.
Never, ever spend your fund credit when you change jobs.
Make an extra voluntary contribution to your fund if the rules allow it or even better, take out a retirement annuity. The contribution is tax deductible, which means that your return on the net amount (after the tax deduction) is much higher than most after tax investments. The point that I really like about an RA, is that you can’t spend the money in it until you reach retirement. You don’t have to take out an RA with a huge contribution. You can start with an affordable contribution and top it up when you receive a bonus or have extra cash on hand.
Unfortunately, the headline of the article mentioned above is a reality. Often you go to presentations, read an article or are informed glibly by some financial services company or consultant in their sales blurb that “only 1 in 10 economically active South Africans retire comfortably”. I’m sorry to be the bearer of bad news but the survey says that only 5.17% of people who retired in 2018 achieved a replacement ratio of 80% or higher. I don’t know about you, but I really don’t think that earning 80% of my final income before retirement is going to cut it for me.
In conclusion I invite every single person who is reading this article to contact us at firstname.lastname@example.org for a free analysis of your retirement situation. Remember that you can still get a tax break for the 2019 tax year.
Wishing you a much better financial year for 2019.