In­creas­ing life­spans mean we have to save more for re­tire­ment

Weekend Argus (Saturday Edition) - - FRONT PAGE - KABELO KHUMALO

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 Cur­rent mor­tal­ity 1% im­prove­ment in mor­tal­ity 65 33% 46% 70 15% 24% 75 7% 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

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