From the editor
Two research reports caught my eye this week – both with a concerning message for investors. The first one – Sanlam’s latest annual Benchmark survey on retirement – found that only 35% of pensioners believe they have saved enough for retirement, and nearly half of current retirees (48%) experience a shortfall between income and living expenses each month.
That South Africans don’t save enough for retirement can’t be news for anyone – we are well aware of the savings pitfalls, such as cashing in retirement savings when changing jobs. But it may be time to start paying more attention to getting our financial houses in order.
A new study by the McKinsey Global Institute (MGI) warns that investors may need to lower their expectations. Despite painful market crashes like 2000’s dot-com bubble and the 2007/08 global financial crisis, the past 30 years were in fact the golden years for investors, with returns on equities and bonds higher than the long-run trend, the Institute says.
Between 1985 and 2014, real total returns for equity investors in the US and Western Europe averaged 7.9% – or respectively 1.4 and 3 percentage points higher than the 100-year average, MGI said. A number of factors drove these exceptional returns: sharp declines in inflation and interest rates; strong global GDP growth, driven in part by China’s phenomenal growth story; and even stronger corporate profit growth thanks to revenue from new markets, declining corporate taxes, and advances in automation and global supply chains that contained costs, according to the report.
In short, it will be very hard to replicate this performance over the next 20 years. In a slow-growth scenario, total real returns from US equities over the next 20 years could average 4% to 5% – more than 2.5 percentage points below the 1985-2014 average, MGI estimates. The stats may be for US equities, but given the correlation between the JSE and the S&P500, for example, we should also pay attention.
What does this mean for investors? People will have to save more for retirement, retire later, or reduce their spending during retirement, MGI says. To illustrate: in order to make up for a 2 percentage point difference in average returns, a 30-year-old would have to either work seven years longer, or almost double their saving rate to achieve the same retirement pot. A tough ask for South Africans who are already falling far short on the savings front.