Retirement is a situation most working South Africans are aware of, but all too many of them don’t know how much money they will need in retirement and seem to put off saving for. A study by the World Bank shows that less than 6% of South Africans have sufficient savings to be able to maintain their current standard of living when they retire. Others will be forced to adjust their standard of living down, possibly becoming a financial burden on their families as well.
In an effort to try to combat the severe lack of savings culture in South Africa, the South African Savings Institute’s (SASI) instituted ‘Savings Month’ – a national savings awareness campaign that takes place in July each year.
The objectives of the campaign include:
- Promoting debate around key aspects of saving
- Raising awareness of the benefits of short, medium and long-term planning
- Get consumers to move from apathy into action
Despite this sterling effort, the results of a FinScope South Africa 2016 survey show that saving and investment by South Africans have stagnated. Savings statistics look as follows:
- 18% of adults are saving for the long term
- 12% are saving for the medium term
- 8% are saving for the short term.
These numbers – while not an accurate depiction of specifically retirement saving and investments – do paint a grim picture of the culture of savings (or rather lack thereof) in South Africa.
Many of the youth feel that retirement is a long way off, and therefore feel no sense of urgency to start saving for it. However, what they fail to consider is that when they retire from full-time work they will still need a regular income to pay their monthly bills, never mind to maintain their lifestyle.
In the past, when they retired employees received a pension that was 70% to 80% of their final salary: retirement funds were calculated based on an individual’s income. This, as you can imagine, used to cost companies a fortune.
These days the responsibility of saving for retirement has shifted from the employer to the individual.
With this in mind, your current income should dictate your income at retirement – aim to have enough savings to be able to receive a similar monthly income from your retirement annuity as you do from your job.
When your pension fund matures, it is advisable to use the bulk of it to buy an annuity to pay you a monthly income – the more you use for your annuity the higher your monthly income will be after retirement. However, you are permitted to take one-third of your retirement capital in cash.
The economy can have a negative impact on retirement investments, and retirees don’t always factor inflation and market volatility into their retirement planning. Inflation and market volatility will impact on your income goal over time and could have an adverse effect on the benefit that your annuity can produce.
Consider your options and take the advice of a professional. Your retirement portfolio needs to include investments that can produce returns that beat inflation to be able to safeguard your income. Risk is often directly correlated with reward: someone who invests where the volatility is very low, for example in cash, will likely have a worse outcome over the long term than someone with a portfolio that can produce returns ahead of inflation, even if the portfolio has a higher risk associated with it.
That said, a certain amount of consistency and guarantee is needed after retirement. Look for a retirement solution that ensures a regular income at retirement, regardless of the market outcomes.
Consider an investment vehicle that delivers consistent income, such as investment real estate. If the properties have been owned for a sufficient length of time to allow the owner to reduce the loan-to-value ratio, the funds generated from the tenant’s monthly rental will provide a stable, steady source of income for retirees. This not only allows the investor to live off the rental earned, but they can also benefit from the accumulated capital appreciation of the property.
Contact IGrow Chartered Accountants to find out how they can source and provide the best retirement solutions to suit your needs. Their qualified experts will be able to implement a retirement plan that will give you the best chance of success when you no longer work.