South Africa’s retirement time bomb – how you can avoid it

To comfortably retire in South Africa, you need to have saved around 25 times your annual spending rate in your final year before retiring. 

This is a reality many South Africans cannot achieve, with the majority of retirees in the country unable to fully retire once at the end of their working careers. 

10X Investments Retirement Reality Report described this as a ticking time bomb, with three-quarters of its survey respondents saying they could not save enough for retirement.

The report also showed that fewer people can retire on their own terms. In the 2021 report, this figure was 70%. This year, it dropped to 60%. 

Daily Investor contacted financial institutions to better understand the retirement crisis in South Africa and how much one needs to save to retire comfortably. 

Head of product at FNB Wealth and Investments, Samukelo Zwane, said the bank’s data shows that most retirees in South Africa need to work part-time jobs to survive in retirement. 

He attributed this to poor financial planning and a lack of understanding about one’s expenses prior to retirement. 

For example, many assume their expenses will decrease in retirement, but this is not always the case. Many reach retirement but don’t experience any reductions in their expenses afterwards.

Pre-retirement, you would have paid for your children’s school fees, medical aid, a vehicle or house, work expenses, and travel.

After retirement, you would expect to reduce expenses by eliminating work travel, school fees, and life insurance premiums. 

But your expenses on medical aid and leisure will rise, he warned. Unplanned expenses like home repairs and overseas travel to visit emigrated children and grandchildren abroad will also impact your savings. 

A rule of thumb often used is that one will need an income equal to 75% of one’s overall income just before retirement. 

However, if you intend to travel and upgrade your lifestyle in retirement, you may need a higher percentage. Contributing as much as possible to a retirement fund and avoiding prematurely withdrawing your retirement savings is advisable.

He also advised South Africans to start as early as possible with their retirement funding and use all tax-free benefits available to them to maximise these opportunities.

It is also important to still have emergency savings in case of unexpected expenses, as you should not withdraw from life or living annuities when you need quick cash.

Citadel Director Nic Horn agreed with Zwane that it is more about how much you plan to spend during retirement than about how much you have saved. 

When asked how much is enough, Horn explained that you have to first clearly define what you would like your life to look like, in rand terms. 

To answer this question, one should consider the following monthly items – groceries, fuel, electricity, and entertainment. 

Even more importantly, you should consider things that don’t happen every day but will happen regularly, such as whether you will fund the cost of education, how often you want to travel, and whether you will replace cars. 

Another important consideration is life expectancy, which is steadily increasing and forcing the amount needed to retire upwards.  

From here, a cash flow exercise is done, and through this, the amount you would need is determined based on your lifestyle.

The simple rule is to live off between 4% and 5% of your savings. If you’re younger, 4% and if you’re older, 5% and sometimes 6%. Then, your financial assets will last forever if you manage them properly.

To calculate how much you need to retire based on the above assumption, multiply your annual spending by between 20 and 25. 

For example, if it costs you R500,000 a year to live, then you will need at least R10 million to retire.

The days of retiring and going on a fixed pension don’t really exist anymore, so the investment strategy beyond retirement is a continuum of the build-up to retirement, Horn said.  

There is a misconception that as you approach retirement age, you should become more conservative with your investments. This is not true, as your investment horizon is at least 90 years old. 

You should rather invest based on when you want to draw from your portfolio and keep in mind the principle of not treating tomorrow’s money the same way you treat money that will be used in 10 years’ time when it comes to managing your money. 

So you should plan your withdrawals. If you know you will need to withdraw in the next two years, there is a way to invest that money, and that is conservative. 

If you have the money you need beyond that period, you can start taking more risk with it because volatility is where growth comes from.