Allan Gray warns of South African retirement problem

Despite taking all of the right steps, millions of South Africans do not have enough money to retire comfortably, with many retirees living on less than a third of their pre-retirement income. 

This was explained by Allan Gray communications manager Twanji Kalula, who said South Africans are at risk of having to make significant lifestyle-related downgrades when they are no longer actively earning an income.

“Sadly, many investors face the realisation that they simply do not have the money to maintain the lifestyle they have become accustomed to, even though they took the right steps to save for retirement,” he said. 

“Worse, this realisation often occurs when there isn’t enough time to do anything about it.”

While the new two-pot retirement system aims to help mitigate some of these problems, other steps are just as important to ensure you have enough money to retire comfortably. 

He explained that one thing many people get wrong is that they do not understand how much they should be saving for retirement. 

“Most personal finance experts suggest that you need to be able to replace at least 75% of your final income at retirement age to maintain a similar standard of living,” he said.

“This generally means that we should be saving anything from 12% to 17% of our income from the day we start working.”

A retirement survey revealed that the average South African retiree can replace only 31% of their income with their retirement savings.

“In real terms, this means that after working for decades, most of us will be forced to live on less than a third of our preretirement income or face the very real risk of outliving our retirement nest egg,” he said.

The survey data also revealed that only 9% of retirees manage to replace 80% or more of their pre-retirement income. 

“These stats are supported by the anecdotal feedback from independent financial advisers who say that 90% of their clients are unable to retire comfortably,” he said.

“This means that many retirees will inevitably become reliant on the financial support of loved ones to make ends meet or have to find ways to continue generating an income.”

He explained that many people start off strong,  proactively setting up a retirement annuity or joining an employer’s pension fund and regularly contributing to these investments. 

They often forget about them for years, assuming we’re on track and that their financial needs will be met when retirement comes.

Kalula warned that many people who rely on employer-sponsored retirement savings do not end up saving nearly enough. 

“You can remedy this by increasing your contributions or supplementing these savings with regular or lump sum contributions to a retirement annuity in your own name,” he said. 

“You can also supplement your existing retirement savings with contributions to a long-term investment product, such as a tax-free investment, which can help you increase the amount of cash available to you at retirement.”

“As with any goal, investing for retirement requires us to set specific targets and perform regular reviews to ensure that the actions we are taking will lead to the desired outcomes.”

How to avoid the retirement crisis 

Since accumulating a comfortable retirement nest egg takes decades, Kalula said investors need to consider the factors that may shift the goalposts over time. 

One such factor is market volatility, which plays a big role. “While investing for retirement is a long-term exercise, over shorter periods, the markets can be volatile,” he said. 

“Attempting to time the periods of volatility can be detrimental, as switching in and out of funds can lock in losses and negatively impact your final outcomes.” 

For those with a long time to go before their retirement, these short-term fluctuations are normally inconsequential. However, they can be detrimental to investors nearing retirement. 

“To minimise the effects of market volatility on your outcomes, you should make sure that the asset allocation of your investments is appropriate for the amount of risk you can afford to take based on your current life stage,” he said.

Inflation is another important consideration when it comes to saving for retirement, Kalula explained.

“To protect the buying power of your investments, you need to make sure the returns they achieve are greater than inflation. To do this, you should take on sufficient risk by investing in growth assets to achieve real returns,” he said.

“Investors who are too conservative when it comes to investing for their retirement may preserve their capital over the short term but find that their nest egg has failed to keep up with inflation over the long term.”

Consumer inflation also plays a role, and over the last few years, many South Africans have had to cut back on their spending to keep up with the rising cost of living. 

“We are all spending significantly more on basic needs like electricity, water, food and healthcare than we were just a few years ago,” Kalula said.

Since these costs directly affect consumer’s budgets, people are very aware of them. 

“Lifestyle inflation, or lifestyle creep, is slightly more insidious. Over time, as we earn more money, we tend to gradually increase our discretionary spending,” he explained.

This could mean spending more on clothes, housing, cars, travel, fine dining, and entertainment.

“The real problem with lifestyle creep is that it happens so slowly that we usually don’t take note of and account for it,” he said. 

“Unless you are keeping track of your living costs by keeping a budget, it becomes easy to lose sight of how much you are really spending to maintain your lifestyle.” 

“If you do not factor in the true cost of your lifestyle when planning for your retirement, you will inevitably experience a shortfall when you are solely reliant on your retirement nest egg.”

This happens partly because early contributions were based on your previous income and lifestyle, and you may need to adjust your current contributions to match your higher spending habits.

He also cautioned investors to consider that people’s lifespans are increasing and, as a result, they need to plan for longer retirements.

When planning for retirement, projections are often based on average life expectancies at the time we start our investments. 

For example, Stats SA reported that from 2002 to 2020, the life expectancy for South African men increased from 59.9 years to 64.6 years, and for women, it rose from 67.2 years to 71.3 years.

“In addition to our ordinary living and lifestyle costs, we also need to factor in the additional healthcare and specialised housing costs that often accompany getting older,” he said. 

“It is becoming more and more likely that young professionals may need to prepare to fund more than 30 years in retirement.”

Kalula added that it is also important to account for other life changes. Major events like marriage, divorce, births, deaths, illness, and injury can significantly impact your financial responsibilities. 

“You may find that you need to stretch your retirement income to support loved ones who remain financially dependent on you or make provision for your own ongoing medical expenses,” he said.

“The easiest way to mitigate the risk of not having enough money when you retire is to perform an annual review of your retirement investments to ensure that your projections are accurate and that your contributions are sufficient to meet your end goals.”

He advised South Africans to regularly review their retirement plans, maintain realistic monthly budgets, avoid making early withdrawals from their retirement funds, and manage their debt. These steps can help them improve their financial position when they retire.