How to retire comfortably

If the current trend – where the majority of South Africans cash out their retirement fund benefits when they change jobs – continues, the average retirement fund member would receive a retirement income of less than 10% of their final pre-retirement salary, data from Momentum Corporate shows.

For many retirees, a replacement ratio of less than 10% would be equal to a pension of less than R2 000 per month.

Figures from the Momentum FundsAtWork Umbrella Funds show just how dire the situation is. Although the numbers only refer to the funds saved in the umbrella fund (some members may also have additional funds in other vehicles), this would be most people’s only source of retirement income given the high prevalence of non-preservation. The numbers are split into three broad income categories.

To put the numbers in context, a rule of thumb suggests that a person targeting an income equal to 75% of her final pre-retirement salary in retirement, needs to have saved around two times her annual salary after working for ten years, and five times her annual salary after two decades.

Default regulations for retirement funds that took effect on September 1 aim to improve the situation by ensuring South Africans get good value for their savings.

Katherine Barker, head of Momentum FundsAtWork, says the regulations cover three main aspects. Boards of trustees need to choose a default investment portfolio that is not excessively complex or unreasonably expensive. They also need to have a default preservation option for members who change jobs and an efficient, easy-to-understand and cost-effective default annuity solution.

But what can members do to improve their situation?

1. Preserve your benefits when changing jobs

According to Momentum, South Africans change jobs every five years on average. Roughly 90% of employees cash out their retirement savings when they jump ship.

Cashing out benefits is arguably the single biggest factor keeping investors from retiring comfortably, as non-preservation effectively “resets” their position. Members shorten their investment horizon and lose the initial benefits of compounding in the process. (Read more about the impact of cashing out benefits here.)

While retirement benefits grow tax free within a retirement fund, cashing out early also has tax implications.

Barker says informed decision-making when changing jobs, coupled with the efficiency offered by umbrella funds and the opportunity to increase contributions can push average replacement ratios up to 50%, which is closer to R8 000.

2. Save more

On March 1 2016 Treasury increased the deduction cap for all retirement fund contributions to 27.5% of the greater of remuneration or taxable income, thereby providing a significant incentive to individuals to save more for retirement.

While the vast majority of South Africans won’t be able to afford contributing almost a third of their income to a retirement fund, even just a small incremental increase each year can go a long way to improve the situation.

But against a background where many individuals find it difficult to make ends meet, saving more can be a tough ask. For those people who haven’t saved for retirement at all, it can be worthwhile to start saving just a small percentage of their salary each month. While it can be difficult to stomach a sudden reduction in your take-home pay due to a higher pension fund contribution, one way of softening the blow is to increase the contribution percentage when salary increases are rewarded.

3. Work/save longer

Although it could practically be difficult to work beyond 65 where a company forces workers to retire, many retirees are using their skillset to start new ventures or work just a few hours a week, which can make a big difference to retirement income.

Moreover, retirement laws have changed. People retiring from employers may now leave their money in their retirement funds and retire from the fund at a later date.

4. Revisit your asset allocation

While investors have no control over the market’s performance, it is important to ensure that you take enough risk in line with your retirement goal and investment horizon, even if you consider yourself a ‘conservative’ investor. Unfortunately, in an effort to simplify investment choices for retirement fund members, funds often choose names like ‘aggressive’, ‘moderate’ or ‘conservative’ which may create the impression that investors who are typically risk averse should err on the side of caution.

But even ‘older’ members need to ensure they take sufficient risk in line with their retirement goals or may need to accept that they will have to lower their standard of living in retirement.

5. Ensure you get value for the fees you pay

Data from National Treasury shows that paying an additional 1% in fees, can reduce the retirement benefit by up to 20% over a 40-year savings period.

While choosing the cheapest retirement fund option (if you have a choice) may not necessarily guarantee the best outcome, it is important to ensure you truly receive value for the fees you pay.

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