South African facing a retirement disaster

Data collected on over 300,000 Sanlam retirement fund members shows that while the official retirement age remains 65, most people can only afford to retire at 80.

This is mainly due to inadequate savings during their working careers or higher-than-expected spending during retirement, meaning their savings do not last and are insufficient to sustain their lifestyle. 

Many individuals also rely heavily on the state and their families to supplement their income in retirement, placing an increased burden on the government’s social safety net. 

Worryingly, if individuals rely on their families for support, this often means that younger generations are not saving adequately for retirement. 

“Our internal member data indicates that while 65 remains the official retirement age, only 25% of South Africans can afford to retire at this age,” CEO of Sanlam Corporate Kanyisa Mkhize said. 

As a result, most people will need to work an additional 15 years to achieve financial security in retirement. 

This 15-year gap represents a financial challenge and a fundamental shift in how people think about retirement planning and employee benefits in South Africa.  

Sanlam Corporate’s insights are based on data from over 300,000 Sanlam Umbrella Fund members, demographic trends, actuarial data, and economic factors affecting the country’s retirement outcomes. 

Based on this data, the average South African is expected to achieve a 25% replacement ratio at the traditional retirement age of 65. This is significantly below the industry benchmark of 75% required for a comfortable retirement. 

Sanlam Corporate’s internal analysis assumes the following:

• Projected investment returns at 9.25% per annum, based on a moderately balanced portfolio benchmark.  
• Estimated Inflation and salary escalation rates at 5.25% per annum, aligned with the Reserve Bank’s mandate.  
• A 35-year savings term, acknowledging that many South Africans face delayed entry into permanent employment.  
• An initial working age of 30 years.  

The extended working years have profound implications for personal financial planning, with workers now having to consider strategies for maintaining employability well into their seventies. 

The problem is not limited to workers, as companies also face serious challenges in managing an ageing workforce that may want to work longer than anticipated. 

Sanlam Corporate’s member data highlights the tensions between retaining experienced older workers and creating opportunities for younger employees in a country with high youth unemployment. 

This problem is compounded by a more fundamental phenomenon – South Africans are living longer than expected as advances in health increase life expectancy. 

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

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 expected 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 risks facing South Africans in retirement is the possibility of outliving their savings. Many retirees live longer than expected and deplete their capital too quickly to sustain their lifestyle.

Another challenge of increased longevity is that living longer does not necessarily mean living well for longer.

Rabson highlighted that while lifespans are improving, health-spans are not keeping pace. This means people are living more years, but those additional years are often spent in poorer health.

This can have serious implications not just for quality of life but also for financial stability in retirement.

“If a retiree experiences poor health early in their retirement, they are likely to face three times higher out-of-pocket medical costs, which can put significant strain on their retirement savings,” Rabson explained.

These medical expenses are often overlooked in retirement planning, as it is generally assumed that expenses will decrease after leaving the workforce.