Forget retirement savings, think wealth creation

LAST week I covered the most recent 10X Retirement Reality Report, which showed that South Africa’s retirement crisis – the fact that so few people are able to afford a comfortable living after they have stopped working – is worsening, despite industry and government efforts to turn things around. It remains to be seen whether Treasury’s proposed “two-pot” savings system – the implementation of which has now been postponed further – will do the trick.

I have long held that the word “retirement” is in itself a major obstacle. Last year, in our digital magazine IOL MONEY, I wrote:

If I was Albus Dumbledore and could wave a magic wand over the South African retirement industry, I would eliminate the word “retirement”. Everything in the industry is geared towards retirement … except it isn’t. It is geared towards long-term wealth creation.

As soon as a young person sees or hears the word “retirement”, he or she switches off. “My life is just beginning. Why should I be concerned with retirement?”

Replace the word “retirement” with “wealth” and the mindset changes instantly. “Wealth? Yes, I want to be wealthy. Where do I start?”

Everything suddenly makes sense. It’s not about reaching age 65 and suddenly becoming redundant to society, surviving on what you have saved. It’s about approaching your finances in a whole new way: spending within your means without taking on unnecessary debt and investing wisely for the long-term towards the ultimate goal of financial freedom. And making the most of (a) the generous tax incentives on retirement products and (b) the magic of compounding.

Outdated concept

I was recently sent an article from Old Mutual, which supports the view that, for younger generations at least, “retirement” has little meaning.

Sharon Moller, financial planning coach at Old Mutual writes: “The traditional concept of retirement simply isn’t relevant to the way the younger generation lives and works.”

If we are to re-imagine retirement in a meaningful way, it’s important to look squarely at this generational disconnect, Moller argues. “In 2022, employment looks very different to employment for past generations. Gone are the days of stepping straight from school or tertiary education into a long-term job with built-in retirement benefits. Many young graduates struggle to find formal employment and must work outside of corporate structures.”

“Since saving for retirement does not happen in the default way it did for previous generations, this generation must embark on self-directed savings plans. But more pressing financial goals tend to take preference – from saving for a deposit on a first home, to educating small children or investing in a small business.”

Moller points out that in the techbased industries in which many young people work, there’s less focus on formal qualifications, such as degrees, and higher value is placed on practical skills gained through short courses and on-the-job experience. For this reason, it’s common for young people to work on a contract-to-contract basis, building a portfolio of experience as they go. “Short-term project work and structured retirement savings are not an easy match,” she says.

New narrative

“While the traditional concept of retirement no longer resonates, planning for future life transitions remains universally crucial for robust financial health,” Moller says. For young working people, the conversation needs to shift from “retirement” to making the money they earn work for them over the long term.

In this new narrative, retirement is not a goal in and of itself. Instead, it’s just another transition that comes about when your lifestyle can no longer be funded by “paid work”.

“At this point, you need another source of income – typically in the form of savings accumulated over your working life. If you can keep working well into your 60s or 70s, you can push out the need to tap into your savings.

“But because no one can know how long they’ll be able to earn – nor how long their savings will have to sustain them – planning for this transition is a form of self-insurance. And the sooner you start, the better your cover.”

Flexible products

Although the way we think and talk about retirement needs to change, existing products provided by the financial services industry are perfectly geared for this type of wealth creation.

Discretionary instruments such as unit trusts and exchange traded funds are ideal for long-term savings, but if you’re focused on building up a nest egg for your golden years, new-generation retirement annuities (RAS) are the way to go because of the tax deductions on contributions.

Unlike the RAS of the past, which tied you into a contract that penalised you if you stopped or reduced your contributions, the new-generation unit-trust-based RAS have the flexibility required for the new world of work.

“New-generation RAS allow people to stop and start their contributions whenever they need to without penalties or excessive red tape. This makes more sense for young people who are working from contract to contract with non-earning months in between,” Moller says.