The death of retirement

A combination of factors – including inadequate savings, high product costs, combined with the likelihood of muted future returns – means the vast majority of people currently working will be obliged to continue doing so for longer than they might have liked or risk outliving their savings. In an ever-tightening global labour market that’s a daunting prospect.

The statistics are sobering. Less than one in 10 of us will retire at 65 – commonly accepted as a “normal” retirement age – and be in a position to sustainably replace 60% of our final salary cheque on a monthly basis. For 20 years the retirement industry, which peddled a plethora of costly and often inefficient savings vehicles, has put the number at 6%.

“A more scientific estimate concluded that more than half the people who have worked and contributed to a retirement fund achieved a pension that replaces less than 30% of their final salary. We believe the minimum target is 60%,” says Stephen Nathan, CEO of 10X Investments. “Savers are at the mercy of an industry that makes unrealistic promises, misleading projections, charges high fees and offers conflicted advice.”

The South African Government has seen the writing on the wall and is working on proposals that the country’s financial sector hopes will make retirement saving mandatory. However, the issues are complex. The bottom line is that unless you fall into the category the private banks refer to as “high net worth” the chances of retiring comfortably much before your 70th birthday are increasingly remote.

One way of addressing the retirement malaise is to make not only some form of retirement saving mandatory, but also to make it compulsory to preserve those funds when changing jobs. Both proposals are understood to be part of a much broader National Treasury discussion about SA’s retirement funding crisis.

One of the biggest constraints to starting to save early is a lack of faith in the investment process. A series of investment scandals and high fee structures have often put investors off even starting the process in the first place. The greatest difficulty facing investors is identifying the most appropriate savings vehicle. For example, there are about twice as many unit trusts in SA – almost 950 – than there are companies listed on the JSE. The local investment landscape is complex and fraught with a myriad of conflicting options for private investors, who face a confusing plethora of investment options. Making the wrong choice early can be devastating to long-term savings. Investors are encouraged to use brokers to select and switch products, all of which undermines the final return they receive on their investments.

In an ideal world we’d all save 15% of our gross salary for the 40 years of our working lives towards retirement. Using available tax advantages and the power of compound interest we’d have a sizeable nest egg by the time we’re put out to pasture. Even if you’ve managed some form of forced saving over an extended period, have you preserved your retirement savings each time you changed jobs? The vast majority of us fail to do even the basics and the temptation to cash in your pension when changing jobs is enormous.

Investment Options

Not everyone is a fan of traditional savings vehicles despite their apparent benefits. Paul Theron, MD of Vestact, says: “Retirement annuities are absolutely useless. They’re a fee-gathering device for brokers and asset managers, and investors get screwed in the process. Goodness knows why Government persists with their tax cuts on contributions made to those investment dinosaurs. What’s more: the cash they pay out after you retire is mostly taxable. Savers with small amounts to put away would be better off putting them in long-term cash savings accounts or buying Government retail bonds; while savers with a bit more should be putting money into a low-cost equity account and reinvesting the dividends.”

The theory of living off dividends is solid under the current tax regime. However, in order to achieve income of R500 000/year you’d need a portfolio worth R10m in current money and achieve an average yield of 5% – a big ask.

Extended Life Expectancy

While many governments worldwide have announced increases to average retirement ages – which will continue to expand over coming decades in an effort to delay the impact of the cost of state pensions on the fiscus – it means governments will require their citizens to be tied to their desks for ever extended periods. The United States is seeking to push its official retirement age up to 67 and Britain to 68, while the Europeans have 70 as a 2040 target.

Life expectancies among the wealthy are continuing to rise, courtesy of better lifestyles, diet and advances in primary healthcare. Organs whose failure five decades ago would have resulted in the relatively speedy demise of their human carrier can now be replaced with relative ease, albeit at considerable expense, thereby extending the period many of us will inhabit the planet. Since 1971 the life expectancy of the average 65-year-old in the rich world has improved by four to five years. By 2050 the average life expectancy in the developed world will have grown to around 70 – up from 65 currently and 61 in 1970.

“As people approach retirement, we strongly advise they review their actual budget and look at two figures: the number to provide ‘comfort’ and the number for ‘basic needs’. As you enter the final straight to retirement, you can then see how your savings compare to these two measures and how to meet those needs,” says John Anderson, head of institutional strategy at Alexander Forbes. “We expect the cost of retiring to increase mainly because of longevity and the impact of reduced real returns from investments. It means people have to save for longer, retire later or reduce their standard of living in retirement.”