Edition: Dec 2013- Feb 2014


Q&A with Michelle du Toit from OMAC Actuaries & Consultants

Du Toit . . . retirement more achievable


Old Mutual research* shows that 85% of correspondents fear that they will not have money when they retire, while 42% said that they have no formal retirement provision in place at all.  Furthermore, 39% will have to work after reaching their retirement age, because they have not saved enough during their lifetime.

Michelle du Toit, head of Old Mutual Actuaries & Consultants (OMAC), says unfortunately many people realise too late that they will not have enough money to retire on comfortably.  However, saving for retirement is doable if you start investing for retirement from an early age and maintain a steady and disciplined savings programme. To help, Du Toit answers some crucial retirement planning questions below.

How much is ‘enough’, and is there any advice you can give people when calculating their ‘enough’?

We believe, simplistically, that there are six key factors at play to ensure a successful and comfortable retirement, namely: how much you contribute; the time period you have saved for; preservation (that is, making sure that when you leave an employer, you do not cash in your retirement fund benefit and spend the money in the short term but ‘preserve’ it by continuing to keep it invested for your retirement years); your expected retirement age; whether you choose the retirement product offered by your employer or take the cash and invest it yourself, and the investment return on your retirement savings. Each individual’s ‘enough’, although different, will take these six factors into account. 

The example below shows that (subject to certain parameters), if you start saving for retirement at age 25, you could be in a position to retire comfortably on a contribution rate of 14.55% of your monthly salary. However, if you only start saving at a later date, you will have to save at a higher contribution rate of your salary the older you get.

25 14.55%
35 22.34%
45 38.65%
55 90.96%

If you do not preserve your retirement benefit if you leave your employer, but choose instead to take the savings in cash and spend it, then this will have a severe impact on your final retirement savings.

The table below shows how your final monthly pension will be reduced as a percentage of your pre-retirement monthly income (known as the ‘replacement ratio’) if you do not keep your retirement income invested for your retirement years when you change employers.

25 75%
35 48.8%
45 28.20%
55 12.0%

What will enable South Africans to make better decisions ahead of retirement?  

Unfortunately people do not have the knowledge they need to start saving earlier in life, which may mean that South Africans either do not understand or know how to save, or that they have not received the communication necessary in order to make informed decisions.

From the ages of 45 to retirement, employers must communicate to their employees early in the process – long before retirement – on their available options. As this is a process, the earlier the employer starts the conversation, the more empowered the individual will be to make the right decision.

However, it is also up to financial advisors and trustees to educate members of retirement funds to make the best decisions.

Our research* shows that 55% of respondents feel that they are either not informed or poorly informed about the underlying investments in their retirement funds. Fund members are clearly lacking the crucial information they need to make informed and sustainable financial decisions, not only during the savings phase of their lives but also at retirement. Advisors need to provide more relevant support for members during all stages of retirement saving, which includes helping them understand how to save.

Do you have any practical advice for people who’ve reached age 55 and realise that they do not have enough money saved ahead of retirement?

People who find themselves in this situation should consider lifestyle adjustments and changes, such as delaying their retirement age in order to save for longer, or to start saving more towards retirement. Reconsider your budget and what you spend your money on, and possibly consider alternate income sources, such as contract work (post retirement).

What are some of the major pitfalls experienced by people aged 55 and up who only start saving for retirement then?  

We’ve seen that access to information regarding how to save is simply lacking, and in many cases, even when people have access to this information, they struggle to understand this information.

Cash flow is simply not available when you start saving for retirement later life.  There aren’t any promotional increases at work at this stage, so there are very little additional income streams.  Medical inflation is also not factored into people’s retirement planning, so many people are surprised when their income cannot cover the escalating medical expenses. A great way to overcome such a pitfall is to continue saving by rechanneling the money. For example, when you are done saving for your children’s education, continue investing but rather channel this into your retirement saving. 

What is your best advice for people who are preparing for retirement?

It’s best to start saving early in life to avoid nasty surprises when it is too late to do anything about it, and partner with a trusted advisor who can give sound advice and help you to plan. Revisit your plan periodically to heck whether you are saving enough for retirement, Additionally, retirement is not just about financial preparedness, but there is also a psychological shift that needs to happen.  Retirement is an entire lifestyle change that will affect all aspects of life, not just the pocket.

* Old Mutual Retirement Monitor 2013