South Africans should reassess their retirement provisions as mortality improves through a better healthcare policy and HIV and Aids management. While this is great news for the country and the economy, it means that South Africans will have to save more and start earlier.
A new global study by the Organisation for Economic Co-operation and Development (OECD) titled A short guide to longer lives: Longevity Funding issues and potential solutions identified South Africa as one of the countries that would experience improving mortality due to improved lifestyle choices, better access to medicine and disease management.
The study showed that the proportion of the population over 65 is steadily increasing – despite the devastating effect of HIV and Aids – and will double by 2050. Meaning more and more people are likely to live beyond what they have planned for, financially.
In countries such as Sweden and Japan, where a large proportion of the population are members of defined benefit schemes, it was increasingly likely that increasing life expectancy would result in funding deficits, which ultimately would need to be addressed by employer and the state. But in countries like SA where defined contribution schemes are the norm, the burden of adequate retirement provision will be the responsibility of the individual member.
Will you have what it takes to fund what may be a long retirement?
You will need more money to retire on than your grandparents and parents did, not only because of inflation but because you are likely to live longer. But South Africans today are saving less than previous generations, a primary reason being that when they change jobs they often withdraw and spend their retirement savings, in many cases using the money to pay off debts.
Your grandparents may have retired at the age of 60, expecting to spend about 10 to 15 years in retirement. But advances in medicine and healthier lifestyles mean that people who retire at 60 today can expect to live about 20 to 25 years in retirement.
Despite these facts, studies show that people are saving less for their retirement. According to the July 2010 Old Mutual Savings Monitor, South Africans are saving less in order to service their mid- to long-term debt, which includes credit card debt, store card debt and personal loans.
In South Africa, retirement funds have moved from being predominantly defined benefit funds to being predominantly defined contribution fund. A defined benefit fund provides you with a pension that is calculated by taking account of your salary at retirement and how long you belonged to the fund. A defined contribution fund, on the other hand, provides you with an undefined final amount, with which you must buy a pension. Only the contributions that you and your employer make to the fund are defined. The risk that you will not have saved enough for your retirement lies with you and this is why you have to be proactive about saving for retirement.
The biggest killer of retirement savings is not preserving your savings. Unfortunately, people tend to access their retirement savings when they change jobs, instead of preserving those savings by transferring them to a different retirement fund or a preservation fund.
If you leave a retirement fund because you change jobs or are retrenched, you have the option to transfer your savings into a preservation fund. In this way, you will preserve both your savings and the tax benefits that are due to you.
Your final objective should be to retire with a pension of 70 to 75 percent of your final salary. It does not have to be 100 percent of your final salary because, when you retire, your expenses – for example, saving for retirement, tax, children’s education and transport – will decrease, enabling you to maintain your pre-retirement lifestyle. Ultimately, your retirement savings should be equivalent to about eight times your final annual salary when you retire.