More than a third (35%) of middle-class South Africans are not putting any of their salary towards their retirement savings, a BusinessTech poll shows.
The poll of 2,702 readers, conducted in mid-January 2022, shows that the majority of respondents (61%) are allocating 10% or less. By comparison, 23% of readers are putting away more than 20% of their salary every month towards retirement.
This aligns with data published by 10X Investments in October 2021 which shows that 64% simply cannot afford to save because there is nothing left at the end of the month. Almost three-quarters of people (74%) believe they will have to generate some income after they retire.
“It is striking that whereas some 35% of respondents under 35 believe that retiring below age 60 is achievable, only 4% of over 50s consider this realistic,” 10X Investments said.
“In the same vein, whereas among the younger cohort (between ages 25 and 49), on average, only 46% expect to work past the age of 64, among those 50 years and older, many more (71%) have wised up to their retirement reality and expect to retire beyond age 64, or not at all. Both sets of expectations seem unrealistic in a country like ours.”
South African households do not save sufficiently for retirement nor their short-to-medium-term needs, the National Treasury said in a December analysis. “Household savings average just above 2% of GDP per annum, most of which is contractual savings for retirement funds.
“However, aside from the low level of savings for retirement, members tend not to preserve their savings, and commonly access them when leaving their jobs. As a result, replacement values at retirement are low,” it said.
According to Sanlam’s 2021 Benchmark Survey, the average replacement ratio is around 25% to 30%, resulting in retirees simply concluding that they cannot survive on the starting pension offered by a guaranteed annuity.
Discretionary savings are also low, and around 34% of people say they do not have enough savings to last more than a month (at most) if they lost their income/jobs, according to the annual Old Mutual Savings and Investment 2021 survey.
Retirement planning entails making provision for the income you will require to sustain your desired standard of living after you retire, said Mariska Comins, head of technical support at PSG Wealth.
“The ideal replacement ratio is generally accepted to be around 75% of your final working salary, and while many struggle to retire comfortably – only around 6% as calculated by National Treasury – there are measures you can put in place to achieve this outcome.”
Making the most of your retirement savings may involve, but is not limited to starting to save as early as possible, said Comins.
On average, people have a 30- to 40-year window of opportunity (i.e. their working career), during which they can take advantage of the wonders of compound interest.
Ideally, the percentage of your salary that you should contribute towards retirement savings is:
- 15% if you start when you are 25
- 24% if you start when you are 35
- 43% if you start when you are 45
- 60% if you start when you are 50.
New regulation the answer?
The National Treasury has acknowledged the country’s low retirement savings rate and in December 2021 proposed reforms to the country’s existing legislation. This includes a new ‘two pot’ system which would allow South Africans to access a portion of their savings early. This will be accompanied by the requirement that the remaining two-thirds are preserved over the long term.
Analysts at financial services firm Alexander Forbes have already estimated that this system could lead to a doubling of retirement saving in South Africa – whilst still providing access to a portion of their savings annually.
Notably, Treasury said the government also plans to introduce legislation to enable automatic/mandatory enrolment. In addition to benefitting traditional employees, this is expected to expand coverage for more vulnerable, contract and temporary workers such as domestic workers and uber drivers.
“Whilst workers that are formally employed and belonging to a labour union tend to be covered under the current dispensation, this is not the case with workers not belonging to any labour union, nor those in the gig economy,” it said.
“Further, consolidation of the retirement fund sector into a smaller number of large retirement funds could bring a few cost advantages to funds and members – including economies of scale, improved governance and disclosure.”