Hidden threat to your retirement 

One of the biggest threats to South Africans’ ability to retire is their own behaviour, with early withdrawals and poor investing decisions severely impacting their quality of life. 

Most South Africans cannot retire comfortably and sustain their quality of life without a regular salary. This forces many to work part-time or even full-time into retirement to maintain their lifestyle. 

Kerri-Ann Sattary, an investment specialist at Cogence, told Daily Investor that this is a global retirement crisis and is not unique to South Africa. 

Sattary said the retirement funding gap is projected to grow by 5% annually, increasing from $70 trillion in 2015 to $400 trillion by 2050. 

South Africa is no exception. More than 90% of people are unable to afford retirement, meaning that they rely on their families, communities, or the state to survive. 

According to the latest 10x Investment Retirement Reality Report, only 37% of South Africans have a retirement fund, and 61% contribute less than 15% of their salary to their retirement savings.

With this gap having remained stubbornly persistent, it is evident that change is required to help people achieve financial health during their life after work. 

It goes without saying that the better the growth of an investment portfolio, the better the financial outcome for the individual investor at retirement. But investment returns are less than half the picture, Sattary explained. 

Investors can no longer focus solely on investment risk – consideration of behavioural risk and health and longevity risk are critical, too, when determining how much is needed to retire.

Improvements in savings behaviour and modelling life expectancy have a material impact on ensuring that savers can retire well and, importantly, in good health to enjoy retirement. 

Sattary said that Cogence’s research shows that retirement challenges are largely behavioural in nature. 

A few critical behavioural factors account for over 90% of South Africans suffering retirement shortfalls. These include –

• Inadequate savings: not saving enough leads to early depletion of income in retirement.
• Insufficient savings terms: not saving for long enough creates a dependence on family for financial support.
• Increased longevity and high-income drawdowns: not living healthily and drawing down irresponsibly in retirement creates a burden on state resources.
• Behaviour tax: emotions play a significant role when making investment decisions; the inability to effectively manage one’s emotions when markets are down can cause individuals to panic, exit the market, and lock in destroyed value in portfolios.

These behaviours are controllable and can be mitigated if individuals invest earlier and for longer, save more each year, draw down less in retirement, and stay invested through market volatility.

While the behavioural elements highlighted above are relevant for both early savers and those soon-to-be-retired, the advantage of time is a key distinction between the two segments. Coupled closely with this is the ability to take on risk. 

The earlier one starts to save, the more time those savings can compound into the future. With more time, an individual can take on more risk, potentially enhancing returns. 

With time on their side, young professionals should prioritise investments in higher-risk, higher-return assets to maximise growth through compounding.

This is in contrast to pre-retirement individuals who shift towards more conservative investments to protect their accumulated savings from market volatility. 

Importantly, Sattary said managing one’s health is equally important for both cohorts as it can extend not only an individual’s life span but also their quality of life, which has a direct impact on income requirements in retirement.