Four major risks to your retirement

South Africans are at risk of having unjustified self-confidence in their ability to retire comfortably. Significant threats come from outliving their savings, inflation eroding their spending power, insufficient investment returns, and overspending. 

Just South Africa, a retirement and life annuity specialist, conducted research at the beginning of 2024 to determine whether South Africans are preparing adequately for retirement. 

The research showed that only 60% of South Africans actively save for retirement, and an even smaller share put enough away to retire comfortably. 

This is a major reason why many South Africans continue to work at least part-time jobs for several years after their working career ends. 

Furthermore, a significant proportion of the population depends on family members and the state to provide for them into retirement, negatively impacting the next generation’s chances of a comfortable retirement. 

10X Investments’ Retirement Reality Report for 2023 revealed that only 6% of South Africans are on track to retire comfortably. 

According to 10X CEO Tobie van Heerden, the survey responses underline the harsh economic realities for most South African consumers. 

“Year after year, we are seeing a large proportion of respondents that have been partially or strongly of the view that they will need to continue earning a living after their formal retirement date.” 

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%. 

“This trend reflects the challenging economic times we are living in, indicating a rise in employers compelling their older workers to take early-retirement packages.” 

The four big threats

The better the growth of an investment portfolio, the better the financial outcome for the individual investor at retirement.

However, investment returns are only a small part of what is needed to retire comfortably, and other factors are becoming increasingly important. 

Just South Africa’s research highlighted four major threats to the ability of South Africans to retire comfortably. These are broken down below. 

• Inflation risk

A well-understood risk to South Africans’ retirement is the impact of inflation on purchasing power. 

While this threat is well understood, it is often poorly managed as few savers bother to ensure their planned income in retirement increases, at least in line with headline inflation.

Failing to plan for this results in many South Africans thinking they have saved enough for retirement but then outspending their annual income due to the rising cost of living. 

The amount of money needed to be saved for retirement should increase in line with inflation as the money needed to maintain one’s quality of life increases. 

• Longevity risk

Another risk South Africans face is outliving their retirement savings as they live longer than expected and draw down too much of their capital to live each year. 

To retire comfortably, without compromising your current and future quality of life, you should not withdraw more than 5% of your retirement capital on an annual basis. 

With an income level of 5% of your retirement savings, you need to save a total of 25 times your final salary to maintain your quality of life in retirement. 

Based on the average household income of R300,000 a year, Just South Africa calculated that South Africans need over R7 million to retire comfortably. 

• Investment risk

This threat comes in two parts – either from not saving for long enough to allow compound interest to work in your favour or from poor investment returns. 

Any delay in saving for retirement will have a big negative impact on your quality of life in retirement and your current quality of life. 

A delay will force you to save more when working, eroding your current quality of life and limiting your retirement money. 

For example, if you begin saving at 20 years old for retirement, you only need to save 15% of your income to retire, with 20 times your final salary at 60. 

However, if you start saving a decade later, you need to save at least 30% of your income to retire at 60. 

If you start even later, at 40 years old, then you need to put away 60% of your income to be able to retire with 20 times your salary at 60.

• Behavioural risk

A hidden threat is your own behaviour, commonly referred to as a behaviour tax, from poor savings habits, overspending in retirement, or the inability to manage your emotions. 

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. 

New asset manager Cogence’s research shows that retirement challenges are largely behavioural in nature. 

These behavioural challenges manifest themselves in a few ways, including not saving enough and for long enough, not living healthily, which results in increased retirement expenditures, and disrupting the compounding process unnecessarily. 

The good news is these 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.