Millennials stuck in pension crunch

ONLY 6% OF ALL SOUTH AFRICANS WILL HAVE ENOUGH MONEY FOR THEIR ‘GOLDEN YEARS’ Signs are worrying that millennials will find the retirement larder empty after all the baby boomers are gone.

Anew retirement survey provides no clear reassurance that millennials will be any better off than their battling parents when they retire. South Africa is facing a major retirement crisis. About 94% of pensioners are unable to maintain their standard of living in retirement. The move from defined benefit retirement funds (where the employer bears the risk of worse than expected investment returns) to defined contribution funds (where the responsibility of saving enough for retirement is effectively transferred to the individual), a lower return environment and increases in average life expectancy may well put millennials (those between 25 and 35) at a relative disadvantage.

A survey conducted by 10X Investments with BrandAtlas among 2 253 economically active South Africans aged 25 and older has highlighted worrying and encouraging signs.

Millennials appear to be worse savers than their parents, with 35% of respondents saying they invest in various options to grow their wealth, compared to 55% of their parents. Thirty-six percent of millennials said they didn’t save or invest at all, compared to 24% of the older generation. Twenty-nine percent of millennials said they didn’t have a retirement plan. Twelve percent of mature respondents echoed this sentiment. Almost 60% of millennials said they planned to retire before 65 compared to 37% of their parents.

When told that paying 2% more in total annual fees over aperiod of 40 years could reduce their final investment value by up to 40%, millennials and their parents were highly sceptical.

Millennials were also slightly less aware of fees than their parents, with 42% saying they didn’t know what they paid.

Interestingly roughly half of all respondents said they paid less than 1% in fees to their financial service providers annually, which was clearly not the case. In 2015, the median total expense ratio (TER) of South African multi-asset funds was north of 1.6%.

When told that the impact of paying 2% more in total annual fees over an investment period of 40 years could reduce the final investment value by up to 40%, millennials and their parents were highly sceptical of the statistic, with roughly 80% of both sets of respondents expressing doubt at the fact.

Steven Nathan, CEO of 10X, said investors with a higher level of distrust were more likely to ask questions and take ownership of their situation.

Nathan said it was not clear whether younger investors would be in a better position 30 years from now. What was unclear was how parents were doing 20 or 30 years ago when they were a similar age. “We know that most people don’t willingly save on their own.”

Nathan said the defined-benefit setting was a very good environment for delivering positive retirement outcomes.