Retirement savings risk for South Africans

People are living longer than ever before, and while that may be a good thing, it does pose a risk for retirement since people are increasingly in danger of outliving their retirement savings.

In South Africa, people are already struggling to save enough for retirement, with only 6% currently on track to retire comfortably.

Globally, people are living longer than ever before. Investec Investment Strategist Chris Holdsworth explained that the world is reaching a tipping point.

Currently, the global fertility rate is 2.25, while the lifetime fertility rate is less than 2.1, the number needed for a population to replace itself through birth alone.

Interestingly, fertility rates have also declined much more than expected. As a result, projections about when the peak global population will be reached have been revised to be closer than initially thought.

The United Nations (UN) estimates that the world’s population will continue growing for the next 50 to 60 years, peaking at approximately 10.3 billion by 1984.

That is two years sooner than the UN estimated as recently as 2022. A few years earlier, the forecast predicted that the world would reach that point only in the 22nd century.

While the world’s population is still increasing, the growth rate has slowed. About half of the countries worldwide have fertility rates below the required replacement rate.

Once the world crosses the maximum threshold, which is only a few generations away, the global population rate will decline. This would be unprecedented outside of wartime, Holdsworth said.

This will impact economies worldwide and raise several concerns. First, population growth has been a key component of GDP growth. If there are fewer working people over time, productivity must improve to offset that.

The ageing population problem

Holdsworth explained that there are also other concerns. Notably, a much larger portion of our population will be over 65.

At the moment, 10% of the global population is over 65. By 2050, those over 60 will comprise 22% of the worldwide population. By 2100, that will rise to 25%. In some countries, it’ll be 30% to even 50%.

We’ll have to deal with a situation where many more people are at retirement age, even though they may not be able to retire yet.

In South Africa, fertility rates are declining but are still well above replacement. The country also has sizable inward migration, which means it is not in the same position as developed markets.

Of course, if fertility continues to decline, it’ll eventually become an issue, but that’s still some way off for South Africa.

However, there will still be a few knock-on consequences for South Africans. First, other countries will be desperate for young, qualified, educated people.

Currently, Africa accounts for 14% of the world’s working-age population. That is set to rise to 42% by the end of the century.

As the world’s youngest and fastest-growing continent, developed nations may start considering how to attract Africans to their countries.

More broadly, people in South Africa and globally will realise that they can’t rely on the current expectations around retirement.

Retirement may still seem far away, but by the time people reach retirement age, that age may have shifted five years later.

Advances in medical technology are improving people’s health, increasing their quality of life and life expectancies. This will significantly shift the retirement landscape in the future.

For example, it could become commonplace for people in their 80s and 90s to still be in the labour force in the coming years.

For those who retire at the normal retirement age, though, the risk is that they will live too long and run out of money before they run out of health.

According to Holdsworth, the best thing South Africans can do is prepare for the possibility that they will live 30 years beyond the traditional retirement age. That means you will need far more savings than previous generations.

“Only 6% of South Africans can currently retire comfortably, which is very low. Something has to give. With so many people living longer and not working, the state simply won’t be able to provide for everyone.”

“There won’t be enough young people, and that’s not just a South African issue – it’s global. People will have to start saving and providing for themselves from a young age to build sufficient retirement reserves.”

Holdsworth stressed that South Africans need to have a plan. Know how much you’ll need in retirement to live comfortably for another 30 years and support dependents if necessary. That plan must be flexible.

Since that can be difficult to achieve alone, it is essential to seek advice. Financial advisors can help you craft a broad-based plan that covers all eventualities and ensures you’re using the right structures.