South Africa is facing a retirement crisis, with 94% of the population not able to retire comfortably, and many people finding out too late that their retirement savings are a lot less than they thought.
This was explained by Investec financial adviser Kgomotso Motloung on the company’s Everything Counts podcast.
According to Motloung, people often reach retirement age and find that they have much less money saved than they realise.
For example, if someone has R3 million saved, that amount has to last for about 20 years. In other words, their monthly income will be around R12,500, which may be significantly less than their monthly salary or even their expenses.
That becomes “very, very difficult” for South Africans who may not realise how much they need to save for retirement while they are still working, Motloung said.
Kate Robson, co-head of Investec My Investments, who also spoke on the Everything Counts podcast, gave advice on how much people need to be saving for their retirement.
“Firstly, there are some general rules of thumb around what you need in order to retire,” she said.
“A lot of that will depend on what you need in retirement. It’s always a really important conversation to have with your financial advisor and every single person’s circumstances would differ.”
This includes whether you need specific health care, a home, or cars, for example. A good rule of thumb is that you need about 20 times your annual salary.
People tend to live to around the ages of 65 to 95, and “effectively, that’s what you’ve got to plan for”, she explained.
Robson added that deciding your investment and retirement objectives and the kind of lifestyle you want to lead after retirement are all important considerations.
“Where are you going to live? Where are you going to retire? Is it going to be in South Africa? Is it potentially going to be offshore?”
“And then I think one of the other key pieces to consider is that it really is never too late.”
Motloung explained that another common method for determining how much to save for retirement is the “replacement ratio”.
This approach considers what portion of your current income you’ll need in retirement based on anticipated changes in lifestyle and expenses.
For instance, by the time you retire, some expenses – like a mortgage – may be fully paid off, and your children will likely be financially independent.
However, healthcare costs often increase with age, meaning some retirement funds may need to be redirected to cover those needs.
Generally, the goal is to replace around 80% of your pre-retirement income to maintain a similar standard of living.
Planners calculate this by considering your current income and factoring in inflation, which changes the purchasing power of money over time.
Typically, inflation is around 3% to 4%, but for retirement planning, it’s safer to estimate it at 5%.
According to Motloung, it is fair to assume that over 20 years, the cost of things will likely double, so it is advisable to work from the worst-case scenario.
Planners will also ask when you plan to retire and assume you’ll need income for about 20 years post-retirement.
Once your retirement target is set, they assess how much you’re currently saving and estimate if that aligns with your goal.
Motloung said that this number is very daunting for many people who feel they will never be able to save that much. This is especially true for a country like South Africa, which doesn’t have a great savings culture.
Robson explained that while retirement planning will look different for everyone depending on their goals, it is generally advised to pay off debt beforehand.
“Creating short-term stability for yourself as part of that financial planning or investment planning journey is really important, and that really does set you up for success in your retirement,” she said
“Debt is obviously something that you would look to pay down as quickly as possible so you’re not having to pay that off when you’re in retirement.”
She added that investing in your retirement can also mean making some lifestyle sacrifices in the short term to set yourself up with the lifestyle you want after you retire.
While many people think they will start contributing more to their retirement savings once their pay increases, this isn’t usually the case.
“Often what we find is that it’s actually easier to make lifestyle adjustments than earning more,” Motloung said.
“What we generally find if you’re able to make that lifestyle adjustment and you’re able to contribute an extra percentage every year to your retirement, it makes such a huge difference.”
If people find they will not be able to meet their retirement goals in time, delaying their retirement from age 60 to 65, for example, can be a great way to bolster that fund.
“If you’re working an additional five years, it makes such a difference,” Motloung said.
The growth from those additional contributions benefits from being tax-free, both on the gains within the fund and the income being invested.
This extra period enhances the compounding effect as more contributions are made tax-free and continue to grow over time.
Additionally, clients at retirement age may have the option to stay with their employers on a contractual basis, even if many companies don’t retain older employees full-time.
While there is still time to make adjustments even as one nears retirement age, Motloung urged people to make important financial decisions before retiring.
“What we generally say is that the best thing you can really do, from a retirement perspective, is to try and make the decisions prior to retirement.”
This is because if you try to make big changes at retirement age, “it’s often a bit too late”.
