People today are living much longer than before, which means that they may retire too early and have far too little savings available to fund their lifestyles post-retirement.
The so-called “normal retirement age” is frequently called into question with having little to no logical reason, while retirement age has a profound influence on the replacement ratio being positive or negative. The replacement ratio is the percentage of final monthly income that is earned after retiring.
For many people retirement age is pre-determined by the rules of the retirement fund they belong to. In 2019 the average retirement age for most pension fund members was 61.4, compared to the private retirement age of 63.
In South Africa there is no actual retirement date set in law apart from that of the government’s old-age grant, while the international Organisation for Economic Co-operation and Development (OECD) have increased their proposed retirement ages from 65 to 67, with the longer-term intention of increasing this further to 75 by 2050.
One argument for South Africa to consider in supporting later retirement dates is how evidence suggests that people who work to an older age are less likely to die early. However, keep in mind that certain jobs do not lend themselves to later retirement.
It is calculated that by increasing the retirement age to 65, rather than 55, the member’s replacement ratio can almost be doubled. Retiring four years earlier means a reduction in one’s post-retirement income by about 10%. This is significant given the average replacement ratio at retirement is 26.7% eg. if your last month’s salary is R100 000 your first month’s pension will be R26 700.
Another argument is how members with longer service, for example, 30 years or more, can expect higher benefits at retirement. With more than 35 years’ service, one can achieve a replacement ratio of 60% or more.
A major argument in delaying retirement is the loss of valuable skills that comes with early retirement, while extending the retirement age keeps a resource of knowledge and experience in the business, which can be used to mentor and upskill the younger generation.
Employee engagement – the extent to which employees feel passionate about their jobs, are committed to the organisation and put discretionary effort into their work – is an integral part of having a successful business. Companies with higher levels of employee engagement tend to outperform those with lower levels, thereby extending the retirement age could make a major contribution to achieve this.
Factors that could affect your decision to delay your retirement
People often look at their retirement money and foresee using a portion of it as a way to get rid of debt. Let’s be candid about this: you should be rid of debt by the time you retire, without using your savings, thereby preventing running out of income. If you are struggling to pay your day-to-day living costs now, you are most likely to receive less of an income in retirement, making your situation more dire.
As said before, you should not retire on a replacement ratio of less than 60% of your last paycheque, with the ideal replacement ratio between 100 and 120%. Delaying your retirement could have a very positive effect on this.
In the case where you haven’t planned for your retirement, you may need more time to do so. With the assistance of your retirement fund counselling, or advice from a professional financial planner, you must look at everything, from your income in retirement and keeping an emergency fund, to where you want to live and dealing with extra expenses like replacing your refrigerator. This must be done no fewer than five years before retirement, otherwise, you will be wise to postpone your retirement a little bit longer if you can.
In the case where you are running your own business, you must work out who will manage it when you retire, including how much capital or income you will get from selling the business. If you are not financially ready to retire, you will likely have to keep the business a bit longer to ensure a longer time to save for retirement.
Another factor that might affect your decision to delay retirement could be the extra costs of healthcare and the many gaps in your medical aid. It could be that you or your partner suffer from a disease such as dementia and require professional care. For some, being retired could be a boring time and if you still love your job, you may want to continue working as a consultant during your retirement.
Most importantly, plan for a long retirement and do not rely on the statistical life expectancy. Plan to live until at least 100, take an active approach to your role in retirement and be on the lookout for opportunities to support and coach other people in your area of expertise to enjoy a fulfilled retirement.