Don’t be fooled by that lump-sum figure in your retirement fund statement

If your retirement fund keeps reporting how big your pot of savings is, you are probably focusing on the wrong number. As a member of a defined contribution fund you only receive your own and your employer’s contributions to the fund plus any growth on those contributions at retirement.

Fund statements typically record these contributions and the growth on them as your fund credit or the lump sum you have accumulated so far.

But a lump sum, like R1-million, can seem like a lot of money until you work out that it means a pension of around only R3 500 a month at retirement. It is this number you should focus on, says Shaun Levitan, the executive director of Colourfield.

He says your fund should also tell you how future contributions will change your likely pension.

Many retirement funds report the projected replacement ratio — the percentage of your current income you are likely to receive as a pension at retirement.

But you have to be sure you know what is included in that income — it may be a percentage of your pensionable salary only and may exclude items like bonuses.

Alexander Forbes plans to communicate the likely outcome of either its new default investment strategy or your chosen investment strategy as a more meaningful projected pension in rands (in today’s money), with no confusion about what proportion of your salary you will receive.

Levitan says these members can then also be told what impact increasing their contributions and changing their investment strategy will have on that income.

A number of administrators including Momentum and Sanlam offer members interactive online or app tools to test the consequences of increasing or decreasing contributions or withdrawing your savings when changing jobs.