To borrow from Benjamin Franklin, “If you fail to plan, you are planning to fail”.
This statement rings true when one considers the recent statistics that paint a bleak picture of what saving for retirement or lack thereof looks like for most South African workers.
The 2021 edition of the 10X Retirement Reality Report, surveyed 15 million economically active South Africans who earn R8000 per month and found that 71% of respondents indicated they had no retirement savings plan at all.
Alarmingly 74% of the respondents believe they will have to generate some income after they retire and leaving a miniscule 7% who are sure that their retirement savings will be sufficient.
A mere 6% of households with income of R50,000 per month feel sure they will not have to keep earning after they retire.
For both income groups it is indicative of how some South Africans are not actively educating themselves about the benefits of different retirement plans.
As we step into a new year, the Eskom Pension and Provident Fund (EPPF) implores all actively working South Africans with or without retirement savings to start saving now or to supplement already existing retirement plans.
“As you save for retirement, it is useful to gauge how much to save and whether you’re on the right track. Everyone’s situation is different, of course, but there are some useful retirement benchmarks that can give you a sense of how you’re doing to reach your goals,” says Ayanda Gaqa, Executive: Governance and Assurance at the EPPF.
Says Gaqa, “To set your retirement savings benchmark, you need to consider these factors, among others — how much you’ve already saved for retirement, your current age, when you’re planning to retire, as well how much income(pension) you want to have at retirement. Then, compare your savings against your current gross income to begin setting savings goals based on your income.”
The best way to test if you will be able to retire comfortably is by finding out how much you will receive as your monthly pension and comparing that to your expected income in the last 12 months before retirement. In that way, and if you do that correctly, you will be able to have an idea of what the difference will be between your income before retirement (salary) and your income after retirement (pension), the so-called replacement ratio.
“If you find that your expected pension will be much less than your salary or your expenses are more than your pension, then that indicates that you might have to downgrade your lifestyle after retirement and possibly consider reducing some lifestyle expenses such as going on holidays, entertainment, expensive car instalments and other non-essential expenses”, he adds.
Reducing liabilities
Not everyone with a shortfall needs to save more as each person’s circumstances are different and you should also consider what your intentions and personal financial goals are.
For example, you might own a house that you do not plan to live in after retirement and you may plan to sell and downgrade to a smaller and more affordable one.
That may reduce your liabilities and increase your income. The best way to reduce your liabilities is to avoid taking more debt and to settle your existing debt as soon as possible so that you have little to no debt when you retire.
Early settlement of debt will be to your advantage and result in you paying less over time as interest on debt is calculated on the outstanding capital at a given point in time.
Some of the ways to increase your income at retirement are the following:
- Increase contributions to your current pension fund by making additional voluntary contributions.
- Do not take your retirement fund withdrawal benefit in cash when changing jobs, instead, preserve your withdrawal benefit in the fund or transfer it to a preservation fund or to your new employer’s pension fund.
- Open a tax-free savings account and contribute from as little as R50 a month. The advantage of a tax-free savings account is that you do not pay income or capital gains tax on returns made from this account (subject to certain limitations). In the long run this can enhance your long-term savings pot.
- Get a retirement annuity fund. You do not have to belong to a particular employer or be formally employed to invest through a retirement annuity fund. This can be a great way of supplementing retirement savings while benefiting from the tax efficiencies applicable to pension funds and retirement annuities.
- Open a savings account in a bank and utilise the savings options offered there.
It is important that one understands the advantages and disadvantages of each of the above to make an informed decision that will benefit them.
Some of the important factors to consider are flexibility of contributions or premiums, access to funds (should you need to make a withdrawal), tax, rate of return on investment (interest/growth), and any restrictions that may apply.
“It is also important to obtain advice from a professional. For example, an accredited financial adviser will perform a financial needs analysis and recommend a saving strategy that is appropriate for you given your specific needs and circumstances,” ends Gaqa.
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