Empower yourself: track your retirement income

Scary calculations showing that achieving a retirement income of 75 percent of your pre-retirement pay is impossible can make saving for retirement seem futile.

But, as Andrew Davison, the head of implemented consulting at Old Mutual Corporate, says, taking control of your financial future is the first step on the road to financial security.

In an article in Collective Wisdom, a publication included in Finweek magazine, Davison says messages that are intended to scare us into better financial habits can become negative reinforcement or frighten us into doing nothing. For example, we are constantly told that we don’t save enough, make bad financial choices, borrow too much, don’t preserve our savings when we change jobs, switch investments at the wrong time, driven by fear and greed, or are underinsured on everything from our golf clubs and jewellery to our own lives, he says.

To achieve financial security, you have to educate yourself, be aware of changes in your circumstances, and exercise restraint, he says.

Colourfield actuary Shaun Levitan says your retirement fund can help you by providing you with an annual benefit statement that shows the income you are on track to receive in retirement and not just your total savings or fund credit. Showing you only your fund credit is like showing you a bank statement and can promote wrong thinking and even bad behaviour on your part, Levitan says.

In a paper written with Harvard professor Robert Merton for the Actuarial Society of South Africa’s conference later this month, Levitan gives the example of Lindiwe, aged 55, who receives a statement saying she has R1 million in her retirement fund.

“Lindiwe is thrilled to have R1 million in her account. She believes she is on track for a great retirement. This is largely based on her perception that R1 million is lot of money. The reality is that her account balance does not provide Lindiwe with any insight into her likely standard of living in retirement. She has a potentially false sense of comfort over her retirement provision,” he says.

Lindiwe, like most members, is unable to determine whether the amount in her fund will be sufficient for her to maintain her current standard of living in retirement.

Instead, Lindiwe should receive a statement showing that her savings are sufficient to provide her with a pension in today’s values of R6 100 a month increasing with inflation and guaranteed for the rest of her life. Her future contributions until her retirement age of 65 are likely to result in her having a further R1 100 a month (in today’s rands) as a pension increasing with inflation (that is, a total of R7 200). Now, Lindiwe is in a position to decide whether or not this income is sufficient.

If Lindiwe tells her fund she needs R8 000 a month in retirement, her future statements will reflect that she has saved only 90 percent of her goal income.

Her statement could also provide her with information showing the impact on her future pension if she increases her contribution rate or delays her retirement date.

Her fund could also provide her with an option to adjust her exposure to growth assets in order to help her to reach her income goal.

Levitan says this information would empower Lindiwe to consider her options and would reduce the temptation Lindiwe may have to access her “pot of money” before retirement.

“Before spending millions of rands and hundreds of hours on educating members about financial concepts, we should try to interact with them meaningfully. Members understand information when it is presented to them in a way they already think. Communication in this way reinforces that our retirement funds are to provide for our retirement and that they shouldn’t be treated in the same way as a bank account,” Levitan says.