For the many South Africans who have saved inadequately there are perhaps only four ways out:
1. The state. But the monthly old-age grant can’t fill a supermarket trolley unless you live on bread alone.
2. Your kids. But it’s a gamble. They have their own priorities, and their own children.
3. Win the Lotto.
4. Cut life expectancy. Start smoking, binge on sugars, hit the bottle and stop going to gym.
Path of change
It’s for good reasons the National Treasury is pushing hard for retirement reform. It wants fee structures and product costs reduced – not to have a go at the profits of savings institutions but to improve the ultimate benefits for savers. It wants to enforce preservation, because keeping pensions in the pot optimises the wonders of compound interest.
The concern of the nanny state is to avoid legions of impoverished pensioners dependent on it.
So bring on the big stick of compulsion to the advantage of state and individual alike.
But savings accumulated over a working life of 40 years cannot provide comfortable retirement.
Let them eat steak
A sirloin at an upmarket Hillbrow steakhouse in 1979 was R5. In 2009, with the equivalent restaurant now in Sandton, the price was R115. Projecting to 2039, when many people retiring today will still be alive, it will be R2 645.
Simeka strategy head Kobus Hanekom calculates you need to set aside 12.5% of remuneration – and enjoy an investment return of Consumer Price Index +5.5% over a period of 40 years to achieve a projected pension equivalent to 75% of final remuneration, net of contributions.
The 35-to-40-year investment term is a problem for many graduates when long periods of study mean they start working at 30.
People need to plan for retirement stretching to 40 years on average, reckons Sanlam chief marketing actuary Viresh Maharaj. “This risk is exacerbated by the reality that many people going into retirement will need to support their children, given SA’s high rate of youth unemployment – as well as their own parents, who themselves will live longer.”
Winners and losers
One of his suggestions is that the value of guaranteed annuities, where the risk is borne by the insurer and not the retiree, be “reconsidered”. It implies either that guaranteed annuities for 25-year periods be priced so expensively that people from age 60 will be hard-pressed to afford them, or that insurers could go bust in providing them.
It’s becoming evident that tax provisions and employment practices structured around mandatory retirement at ages 65 and below are absurd.
For the longer term, behavioural adjustments will need to be radical. For the short to medium term, there’s little salvation. So ponder your future over a smoke.