Thirty-something members of defined contribution retirement funds are, on average, currently due to receive a pension of only 39 percent of their income at retirement.
They need to almost double their fund contributions – to 25 percent of their income, on average – if they want to receive a pension of 75 percent of their income, the latest Alexander Forbes Pension Fund Index shows.
Alexander Forbes is the biggest retirement fund administrator in the country and its Pension Fund Index measures the percentage of final income the average retirement fund member can expect to receive as a pension from their retirement savings when they retire.
The index began in 2002, tracking members then aged 30 (born in 1972), 40 (born in 1962) and 50 (born in 1952) who all had savings sufficient to provide an income on retirement of 75 percent of their income.
Alexander Forbes has now added the expected pension for a person born in 1982, currently aged 32.
The index is based on an average contribution level of 13.3 percent of income (employee and employer contribution combined) and with retirement savings beginning from age 25.
Since the index began, it has measured the effect of anticipated future returns, as well as the cost of buying an annuity (monthly pension).
In all cases the ratio of pension relative to income has declined.
It shows that, based on these averages, instead of a pension equal to 75 percent of income, the retirement fund member born in 1952, who is now 62, can now expect to receive a pension of 64 percent of income, the 52-year-old member 48.8 percent of income and the 42-year-old only 39.7 percent of income.
The decline in the pension/income ratio has been greatest for the 42-year-old member, who can expect, at current contribution levels, to receive little more than half the 75-percent pension.
The 32-year-old, who began saving for retirement in 2007, was from the start not able to save enough to provide a pension equal to 75 percent of his or her income.
The potential pensions are decreasing as a result of expected lower future returns on your retirement savings and an increase in the cost of purchasing an annuity.
Alexander Forbes advises young people to:
* Start saving early to enjoy the greatest benefits of compounding interest;
* Save enough to ensure you receive a reasonable pension; and
* Preserve your savings when you change jobs.