Increasing lifespans mean we have to save more for retirement
As we inch closer to National Savings Month in July, we are reminded that we have become so accustomed to satisfying shortterm gratification that we have adopted the mentality of “tomorrow can wait” when it comes to planning for our retirement.
This was the consensus of the Financial Planning Summit hosted this week by Discovery.
We are living longer, which means our retirement savings will have to last longer.
According to the United Nations Department of Economic and Social Affairs World Population Prospects 2015 report, the number of people living to 100 is increasing rapidly, and is projected to grow from 451 000 in 2015 to 3 676 000 in 2050.
Life expectancy is improving, with global life expectancy Retirement age 65 70 75 Current mortality 33% 15% 7% 1% improvement in mortality 46% 24% 12% The following assumptions were made in calculating the above percentages: • Salary inflation: 5% • Discount rate: 6% • Lump sum already saved by the age of 40: R1 million • Effect of medical expenses has been ignored growing from 64.5 years in 1990 to 71.4 years in 2015 according to Our World in Data.
Are we saving enough to face the financial headwinds that come with ageing?
Discovery chief executive Adrian Gore provided Personal Finance with the example of a 40-year-old man who earns R65 000 a month. The table above provides the percentages of his income that the man will have to save to maintain an income replacement ratio of 70% in retirement. Gore says women need to save more of their income, because, on average, they can expect to live 4.5 years longer than men.
“With medical inflation 3% to 5% greater than headline inflation, medical expenses will significantly impact income in retirement. Assuming that medical inflation is at 9% and that his salary in retirement increases by 5%, a man who retires at age 70 with a net (after medical expenses) replacement ratio of 58% will have his net replacement ratio reduce to 33% when he is 96 years old,” Gore said.
The conventional wisdom is that you need to replace 75% of your income to ensure a comfortable retirement. This assumes that you will have paid off your home loan and other large debts by the time you retire.
It is difficult to cut back on your non-essential expenses and save, but you have to do so if you want to retire financially secure. For example, it would greatly enhance your retirement portfolio if, in addition to contributing to your retirement fund, you saved R600 a week out of a salary of R30 000 a month.
Data from the Old Mutual 2017 Retirement Monitor showed that, between 2012 and 2016, the number of employed South Africans who were likely to cash in their retirement savings increased from 19% to 35%.
The report said that 30% of working South Africans have no formal retirement savings vehicles, and this percentage jumps to 58% among people who earn less than R5 000 a month.
About 23% of working South Africans are part of the “sandwich generation”, which means they are supporting their adult children and their parents.
As many as 73% of those surveyed believe that, in today’s society, there is no alternative but to get into debt.
The percentage of people who do not belong to a retirement fund who expect they will have to work after retirement has risen from 52% in 2012 to 58% in 2016, the Monitor reported.
Malusi Ndlovu, the head of Old Mutual Corporate Consultants, says it is important for employers to work with qualified consultants to design retirement structures that make positive retirement outcomes possible for their employees.
“This is particularly important for employees who are financially vulnerable and rely on guidance from experts to make the right financial decisions.
“While the industry is making inroads in promoting awareness of the importance of [the] preservation [of retirement savings] and proper financial planning, there is still plenty of work to do to ensure that South Africans can retire in comfort,” Ndlovu says.
kabelo.khumalo@inl.co.za