Don’t be in the dark about retirement

Many of us have only a vague idea of what pension we’ll get

● More than a third of members of employer-sponsored retirement funds say they know “little” about their fund but want to know more, according to the latest “Retirement Reality Report” by 10X Investments.

A high 40% of respondents, including many earning more than R50,000 a month, say they have a “good understanding” of their retirement scheme, but this could reflect our tendency to be overconfident, says Hilan Berger, the head of institutional business development at 10X.

Michael Prinsloo, managing executive: research & product development at Alexander Forbes, says research shows that even though people say they understand their fund, they don’t. “They don’t understand the mechanics or the tax or what they can do with retirement money. Understanding is short-lived, too,” he says.

Berger says most fund members, including the CFOs of companies and even trustees, are very poorly informed. Many trustees can’t say how much they’re paying in fees, where their fund’s money is invested, and if it has performed in line with the market, he says.

The report by 10X, in collaboration with Brand Atlas, is based on online surveys among 10,780 economically active South Africans with a monthly income in excess of R7,600.

According to the survey, 43% of people earning less than R20,000 admitted they know little about their fund. As many as 48% of respondents aged between 25 and 34, and 38% of those aged between 35 and 49 said they know little about their fund.

Whether you’re in your first job or have only 15 years left to save for retirement, what are the key questions you should be asking?

What income will my savings give me in retirement?

You may have some idea how much is in your retirement fund but knowing what’s in the pot isn’t very helpful. You need an estimate of the income your savings will provide in retirement if you keep saving at your current rate and investing in the same portfolio.

Some funds provide this information, others show your “replacement ratio” — your expected pension income expressed as a percentage of your monthly income immediately before retirement.

On average the actual replacement ratio of retirees was 28.81%, according to Alexander Forbes’ 2018 Member Watch Survey, which means most people will find they have saved too little.

Your replacement ratio is affected by the percentage of your salary you contribute, the returns you earn, the costs you pay and the period for which you remain invested.

Alexander Forbes says that retiring at 65 rather than 55 can almost double your replacement ratio.

How much do I contribute?

It’s useful to know how much you’re contributing to the fund, how much your employer is contributing, and what portion of that goes into your retirement fund, especially if you need to increase your savings.

The average net contribution to a retirement fund is 12.17% of income, according to the latest Alexander Forbes Member Watch Survey, Prinsloo says.

But you (and your employer) probably need to be contributing more than 17% so that you will be on track after 40 years to have an income in retirement equal to 75% of your final pay cheque, he says.

If you have less time to save, you need to be saving a higher percentage of your income to maintain your standard of living in retirement.

You can contribute up to 27.5% of your taxable income to retirement funds each year. If you started saving late in life, and can afford to save as much as this, you should.

The 10X survey reflects the reality that South Africans are under enormous financial pressure, making saving difficult, while those who have been retrenched will be contemplating spending their retirement savings to survive.

Ideally, you should preserve your retirement savings when changing jobs, Prinsloo says. It is critical to have insurance and short-term savings so you can avoid raiding your retirement savings.

Do I have group life benefits?

If you do, establish what income your fund would provide if you were disabled, permanently or temporarily. If you would receive a lump-sum benefit, what income can it buy? Is it enough or do you need to buy additional cover from a life assurer?

What is the death benefit that would be paid to your dependants? And is it enough to provide for their needs?

Prinsloo says it doesn’t help to know your group life death benefit is three times your annual income, as that may be enough to look after your family for only three years. Both he and Berger say the amount you need depends on your circumstances.

You should also find out if your group life cover is deducted from your employer’s contribution and only the reduced balance is invested in your fund. Berger says most providers don’t disclose how much of your contribution is funding your group life cover.

Where are my pension savings invested?

You need to know this to estimate your expected returns and whether these are appropriate given the time you have to save until retirement.

You have to be in an investment spread across asset classes but you may be too conservatively invested given the time you have to invest.

If your fund provides investment choice, guard against making poor decisions based on market sentiment or the advice of friends, Prinsloo says.

The average member is better off in a fund’s default portfolio, which usually invests you in line with your stage in life and how long you have until retirement, both Prinsloo and Berger say.

What costs am I paying?

Berger says costs affect your retirement outcome irrespective of the retirement vehicle you’re in, and compound over time.

A saving of 1% on your fee can have a significant impact. On R1m, a one-percentagepoint saving compounded over 20 years can save you R1m in fees, he says.

Retirement fund members paid on average 1.09% for administration fees and other expenses in 2018, according to Alexander Forbes. If your fund is paying more than that, you should ask your trustees why.