Major retirement problem for South Africans

South Africans are living longer, which may result in their savings no longer being sufficient for retirement. 

This calls for a rethink of how much should be saved to retire comfortably in South Africa and for asset managers to change how they invest in retirement and the kind of products they offer. 

Discovery Invest CEO Kenny Rabson explained that recent advances in investor behaviour and wellness have forced asset managers to change their views on saving for retirement. 

Rabson revealed that, on average, Discovery Vitality clients live to 83 years – a substantial number of years more than the average life expectancy of individuals in developed economies. 

This is only likely to continue, with individuals living longer than they expect and longer than the previous generation. 

“While the impact of science on longevity is undoubtedly a cause for celebration, it introduces something of a conundrum when it comes to planning for retirement,” Rabson said. 

One of the most significant threats to South Africans in retirement is outliving their savings as they live longer than expected and draw down too much of their capital to live each year. 

Another major threat living longer poses is that it does not necessarily mean that one lives well for longer. 

Rabson explained that while people’s lifespans are improving, their healthspans are not improving at the same rate. In effect, people are living longer, but in those additional years, they are less healthy. 

This can have significant consequences not only for quality of life but also for the affordability of retirement.

“If a client is sicker during their earlier years of retirement, they will typically have three times more out-of-pocket medical expenses, which can significantly impact their retirement fund,” Rabson said. 

These types of expenses are typically not considered when planning for retirement, as it is generally assumed that expenses decline once your working career ends. 

Living longer than expected will have financial consequences in retirement and will affect saving behaviour throughout an individual’s life. 

Rabson explained the impact this could have on individuals’ retirement savings, with the general rule being that they would have to save more and start earlier. 

Living beyond anticipated years can significantly affect an individual’s replacement ratio and the amount of money they have access to in retirement. 

“If a client lives five years longer than expected, their replacement ratio can fall below 50%, creating a serious challenge to maintaining their lifestyle in retirement,” Rabson explained. 

“It’s a complex advice spectrum that advisers must navigate, balancing health, longevity, and finances.”

Poor financial behaviour compounds the threat of living longer than expected, as missteps in saving and investing exacerbate the problem of not having enough to retire. 

“The fact is that clients are actually largely irrational. There are so many books and papers that have been written now in terms of how decisions are shaped by how losses are perceived,” Rabson said.

Biases such as loss aversion, short-termism, overconfidence, hyperbolic discounting, and herd behaviour play a significant role in decision-making. 

These can lead individuals to make choices that undermine their financial well-being, particularly when it comes to saving and investing for retirement. 

Hyperbolic discounting, for instance, refers to the tendency to greatly prefer smaller, immediate rewards over larger, delayed ones.

A more common era that investors make is trying to time the market or, by acting out of fear, take their money out of investments and disrupt the compounding process. 

Rabson said the recent heightened market volatility and fear of underperformance have led to a more conservative investment approach among many local investors. 

As a result, many have chosen to invest their money in fixed-income funds instead of equity funds out of fear of losing money. 

In effect, individuals are choosing the perceived safety of predictable returns over short-term volatility that will lead to better long-term outcomes. 

To overcome this, Discovery Invest uses the company’s shared-value model to encourage better decision-making from clients. 

It also uses the extensive data collected from Vitality clients to better understand the potential for living longer and, thus, the need to save more for retirement.