Insufficient retirement savings

Changes made to retirement savings in the 1990s have left many employees worse off, according to the results of the Sanlam Employee Benefits 2011 benchmark survey. In the 1990s the risk and responsibility of retirement savings was shifted from the employer – known as defined benefits – to the employee – known as defined contributions. Members are still not accepting responsibility for their own retirement savings – and many members aren’t actually aware that they carry the risk.

The research found that out of the respondents who resigned or switched jobs over the past year, more than 70% cashed in their retirement funds, and only 18% preserved their funds. In most cases they used the savings to pay off short-term debt.

Many people find the range of options for retirement saving bewildering and instead of looking for help; most members push the responsibility of saving for their post work years to the bottom of their priority list until about five years before retirement when the uncertainty of their future is more imminent.

53% of respondents believe that they are on track for retirement, yet nearly one-third do not know how their retirement savings have been invested and 29% don’t know that they have a choice in how they are invested.

The current retirement industry model – developed in a post-World War II environment when people typically stayed at the same company until retirement – is outdated. What is needed now is a shift from focusing on improving knowledge, to focusing on changing behaviour.

According to the Old Mutual Retirement Monitor 2011 booklet there is a need to change our country’s approach to saving for retirement. Satisfaction levels with the state of retirement provision are mediocre at 5.8 on a scale of 1 to 10. 58% of respondents expect to continue to work for pay after formal retirement and the vast majority acknowledge that this will be due to financial necessity rather than choice.

Of those surveyed who had left their previous employment voluntarily, some 48% took all or some of their retirement benefit in cash. This figure rises to 56% for those leaving employment for involuntary reasons (e.g. dismissal or retrenchment). Only 9% of respondents that left or changed employment due to dismissal or retrenchment placed funds in a preservation plan and only 1% of voluntary job leavers did so.

While the average satisfaction rating, by pensioners, of the financial provision they have made for retirement is 6.95 out of 10, strong evidence still exists that pension adequacy is under pressure. The vast majority of pensioners surveyed report a drop in their standards of living after retirement. Many also point to this situation worsening as they advance in their retirement years.

Some respondents regard their children as a form of substitute retirement policy, and will depend on their children for financial support during their retirement years. This may influence the tendency of the respondents to save towards the schooling and educational needs of their children. In cultures where this dependence on children is accepted as standard practice, this could in fact be a wise trade-off, particularly if it ensures that the children are able to achieve a far higher earning capacity once they start working. It remains very concerning that only 54% of respondents who are currently 10 years or less away from retirement age are actually saving for that retirement.

Most individuals are not managing to meet their retirement goals and, on average, they find themselves five years behind target in their retirement savings plans. While short-term solutions may be possible for those who already find themselves in this situation, long-term, mindset-changing interventions are required in order to educate people regarding tax-efficient and disciplined retirement savings and encourage them to adopt this approach as a matter of course.

The fact that contribution levels are generally too low points to a lack of understanding of the need to err on the side of caution when preparing for one’s retirement. People need to be taught that one should never aim to save ‘just enough’ for retirement, but rather to approach it from a clear understanding of exactly what they will need to maintain their standard of living, and then allow a little bit extra if possible.