“The greatest trick the devil ever pulled was convincing the world he didn’t exist. And like that – poof – he’s gone!” – Verbal Kint talking about Keyser Soze – The usual suspects
The second greatest myth is your company pension and your expectation of what it will be worth at retirement.
Your expectation is that the pensionable salary will approximate your final working salary and in assuming this we use the following assumptions:
- You have contributed to the company benefit scheme for 40 years;
- Your contribution and the company contribution will form part of the pension with a 7.5% contribution from both parties;
- Where you have changed employment, all benefits have been transferred to the appropriate preservation funds with no withdrawals;
- Your salary has enjoyed a steady 5% per annum increase; and
- The pension fund has compounded by 5% per annum.
Does the above sound a touch too good to be true?
Let’s assume that the above is true and that the annual drawdown from your annuity at retirement is restricted to 6% to ensure the preservation of pension capital.
If all the above comes into effect, the result would be that your new “pensionable salary” would be no more than 40% of the last salary you earned:
|Year 1||Year 5||Year 10||Year 15||Year 20||Year 25||Year 30||Year 35||Year 40|
|Salary||R10 000.00||R12 155.06||R15 513.28||R19 799.32||R25 269.50||R32 251.00||R41 161.36||R52 533.48||R67 047.51|
|Contribution||7.50%||R750.00||R911.63||R1 163.50||R1 484.95||R1 895.21||R2 418.82||R3 087.10||R3 940.01||R5 028.56|
|Company||7.50%||R750.00||R911.63||R1 163.50||R1 484.95||R1 895.21||R2 418.82||R3 087.10||R3 940.01||R5 028.56|
|Opening Balance||R-||R87 516.45||R251 315.17||R498 942.76||R864 216.97||R1 393 243.18||R2 148 622.78||R3 215 048.96||R4 706 735.31|
|Contribution||R18 000.00||R21 879.11||R27 923.91||R35 638.77||R45 485.10||R58 051.80||R74 090.44||R94 560.26||R120 685.52|
|Growth||R900.00||R5 469.78||R13 961.95||R26 729.08||R45 485.10||R72 564.75||R111 135.66||R165 480.46||R241 371.04|
|Closing Balance||R18 900.00||R114 865.34||R293 201.03||R561 310.61||R955 187.17||R152 3859.72||R2 333 848.88||R3 475 089.68||R5 068 791.87|
|Last salary||R67 047.51|
|Pension value||R 5 068 791.87|
|Drawdown %||6%||R304 127.51|
|% of Salary||38%|
If we maintain the same annual “salary”, the mathematical life span is then just over six years but more realistically it would be approximately eight years with the assumed compounded growth enjoyed during your working career. Any adverse market conditions (covid for example) will negatively impact on the longevity of your financial lifespan.
So, taking a 60% decrease in earnings comes with some challenges which need to be addressed as your monthly expenses would not necessarily have decreased.
Now comes the real challenge.
What can we do without which was previously included?
- Medical aid is a requirement but most likely would be downgraded to a lower benefit option.
- Your utilities will remain.
- Car and household insurance should remain.
- In principle, there shouldn’t be any commitments to bonds.
- Do we cancel or reduce life insurance?
- Disability cover generally falls away after 65.
This gets compounded by the statistics that a couple who retire at 65 has a 50% chance of one of the two living to 90 with the advances in the medicine – 2017 Sanlam Glacier report
What is the alternative and who or what funds the next 20 odd years of retirement?
“The nicest thing about not planning is that failure comes as a complete surprise and is not preceded by a period of worry and depression!” – John Preston – Boston College
Before we present the solution please consider the following statistics:
The retirement age going forward is most likely to reduce to 60 from 65, which statistically implies that your retirement funding needs to be sufficient to enable you to survive another 30 years without any additional income sources, practically three-quarters of your working career.
Ninety percent of all South Africans will retire with half of the capital required.
Six percent OF ALL South Africans will retire with enough money and these are most likely the business owners – National Treasury
49.2% live below the upper-bound poverty line after retirement – StatsSA April 2019
What is the impact of inflation and future costs and therefore what will my money be worth?
CPI + 50% is the average annual cost your medical aid will increase by and a R4000 per month medical aid will cost approximately R21 673,00 30 years down the line subject to a 6% annual inflation.
R190 is the real value of R1 000 over 30 years with inflation.
Currently, R1 000 buys 69 litres of petrol @ R14,39/l and the equivalent cost in 2037 would be R5 263 taking inflation, capital erosion and exchanges rate into account. This adds a whole new cost dimension to the family holiday.
The average South African has approximately R1 800 000 in retirement savings and based on an 8% withdrawal rate would be equivalent to a gross R12 000 per month salary. An 8% withdrawal rate is likely to have some form of capital erosion. – Just Retirement Insights
The Association for Savings & Investment South Africa’s (Asisa) South African MA Medium Equity unit trust 10-year average is reported at 7.6% per annum while the more relevant five-year average is reported at 4.25% per annum. – (Source: Morningstar Nov 2020)
It is, therefore, crucial to start saving towards your retirement as early as possible and the harsh reality is that “when you retire, you often suffer a loss or reduction of income, but daily expenses remain and grow with yearly inflation and economic turmoil”. – Fedgroup Life chief executive Walter van der Merwe
Most South Africans only start retirement planning at age 28 but should really start from at least age 23 – Sanlam Benchmark Survey
“I bought my first stock at age 11. I wish I had started earlier” – Warren Buffett
The benefits of starting early can be easily demonstrated by using the following example. Two investors investing the same money into the same funds and enjoy the same returns. Investor A starts immediately and invests monthly for 10 years and thereafter only receives the compounded interest. Investor B invests the same monthly amount, enjoys the same compounded growth, but starts in year 11. Investor B will never reach the value Investor A has.
|Monthly Contribution||R1 000.00|
|Investor A||Investor B|
|Opening Balance||Contributions||Growth||Closing Balance||Opening Balance||Contributions||Growth||Closing Balance|
|Year 1||R-||R12 000.00||R1 200.00||R13 200.00|
|Year 5||R61 261.20||R12 000.00||R7 326.12||R80 587.32|
|Year 10||R179 249.10||R12 000.00||R19 124.91||R210 374.00|
|Year 11||R210 374.00||R21 037.40||R231 411.41||R-||R12 000.00||R1 200.00||R13 200.00|
|Year 15||R308 008.58||R30 800.86||R338 809.44||R61 261.20||R12 000.00||R7 326.12||R80 587.32|
|Year 20||R496 050.90||R49 605.09||R545 655.99||R179 249.10||R12 000.00||R19 124.91||R210 374.00|
|Year 25||R798 894.93||R79 889.49||R878 784.43||R369 269.78||R12 000.00||R38 126.98||R419 396.76|
|Year 30||R1 286 628.28||R128 662.83||R1 415 291.11||R675 299.99||R12 000.00||R68 730.00||R756 029.99|
|Year 35||R2 072 127.71||R207 212.77||R2 279 340.48||R1 168 164.71||R12 000.00||R118 016.47||R1 298 181.18|
|Year 40||R3 337 182.40||R333 718.24||R3 670 900.64||R1 961 928.27||R12 000.00||R197 392.83||R2 171 321.10|
The minimum investment we should make is 15 – 20% of our salary from the age of 20 – 60. – Fedgroup Life
75% of South Africans rely on the government old-age pension which currently offers R1 800 per month.
67% of South Africans have no formal retirement plan. – 10X Retirement Reality Report (RRR19)
77% of South Africans who have a retirement plan will need to continue earning an income after retirement. – 10X Retirement Reality Report (RRR19)
7% is the average contribution to retirement but it should be a minimum of 15%. – Sanlam retirement infographic
62% of South Africans who change employment do not reinvest retirement savings. – Sanlam retirement infographic
90% of staff members never look at their benefits and its performance after joining the fund and are blissfully ignorant of its performance or lack thereof, relying on HR managers and colleagues to make the right investment choices for their retirement. – Sanlam retirement infographic
25% of working South Africans support adult children and parents. – Old Mutual Savings and Investment Monitor
So, what is the solution to the above?
For many of our citizens, it may be too late, but that should not prevent you from making some provision.
You cannot rely on your company retirement benefits to solely support you for an almost equal period as your working career.
The onus lies with the individual to make sufficient provisions to prevent becoming one of the 94% who will not retire properly.
An advisor will be of great benefit in structuring an optimal retirement strategy which is tailor-made to the individual’s requirements, helping you prepare for your golden years.