RYK VAN NIEKERK: One of the most significant challenges that every one of us faces when saving towards retirement is to know whether our retirement plans are on track to ensure a comfortable retirement one day. Jaco van Tonder is Advisor Services Director at Investec Asset Management, he joins us now. Jaco, welcome to the show, earlier we spoke about the retirement formula, now this formula states that you should be okay if you save around 15% of your pre-tax salary from the very first day you start to work and you do this for 40 years and that should, in theory at least, give you around 20 times your annual salary, which would allow you to enjoy a comfortable retirement. This seems to be a pretty simple formula, save 15% for 40 years and you’ll be okay.
JACO VAN TONDER: Hi Ryk, ja when you say it that way it does sound quite simple, doesn’t it, and actually that is as simple as it is but maths makes it work on your behalf. Forty years is the number that you need and that’s probably the average duration of most people’s working lifetimes, although, if you believe what the futurists are saying we might be working for more than 40 years. But that’s as simple as it is, start early stick to the plan and the one component, which is very important, is to not actually withdraw any of the money along the way. So not only must you save consistently throughout the 40-year term but you must also resist the temptation to cash in on some of the money after ten years to pay off your bond or to go on a holiday or start a new business.
RYK VAN NIEKERK: Yes, the early withdrawal of retirement savings is never a good idea. But, Jaco, it isn’t always easy to look at the accumulation of the retirement savings and to know that you are on track to reach your goals, what are the rules of thumb to track this performance early in your working career to see whether you will indeed retire with sufficient funds one day?
JACO VAN TONDER: Ryk, nowadays every pension investor receives by law what they call a pension benefit statement, a member benefit statement, every year that should show you what the balance is that you’ve saved up in your retirement fund. So the number is fairly easy to get, the challenge is how do you know whether that number is on track and there are some useful goalposts that I think we can share with listeners that will help you ascertain broadly whether you are on track or not. For most people I think the conversation about retirement savings tends to snap into sharp focus around your late 30s, early 40s. You’re almost 20 years into your working career, you’ve got a family, more responsibilities and people start thinking about retirement for the first time being a reality. If we assume that is your first checkpoint, 20 years into your working lifetime, our calculations show that you should have around five times whatever your salary is at that point. Let’s say you’re 40 years old, whatever your salary is at that point you should have about five times that value saved as a retirement pot at that time. So if your annual salary is R500 000, you should have about R2.5 million saved in your retirement fund by that age. The second checkpoint we can look at is probably about ten years before you want to retire, so for most people this will be age 50, maybe age 55 if you are going to be retiring at age 65, and the figure is ten per ten, so ten years before you retire you need ten times whatever your annual salary broadly is at that time. Then five years before retirement is when you are almost entering that final growth path, you should have about 15 times what your pensionable requirement is going to be. So if the annual income that you need when you are retired is R1 million, then five years before retirement you should have about R15 million saved up. That puts you on the right glide path to reach that comfortable retirement outcome.
40 years old and no savings
RYK VAN NIEKERK: That’s interesting and easy to understand. But Jaco, what happens when you get to, say, your early 40s and you do not have the R2.5 million you should have? In terms of your example, say you only have R2 million saved up, can you then make an adjustment to try and get back on track?
JACO VAN TONDER: Yes, you can generally – and I think the earlier you make adjustments the better. Long-term saving is incredibly sensitive to the term that you are saving and any adjustment that you make early on tends to have a really big impact at the end and, conversely, any adjustments that you delay, for whatever reason, for too long tends to bite you quite harsh. One interesting statistic that we can share in this regard – the standard formula, as you say, is over 40 years, but let’s say someone says, listen, I only want to save for my retirement for 30 years, so I’m starting when I’m 30 but I want to be done when I’m 60 years old, so I want to get the whole job done not in 40 years but in 30 years, what do I need to contribute of my salary every month to make that happen. The maths is clear, the 15% that you have to contribute, if you are happy to save for 40 years, actually doubles to 30% of your salary – that is what you have to give away every month in order to save the same amount of money over 30 years. So the key challenge when you start deviating from this glide path or trajectory for a successful retirement is: a/That you realise it early, and b/To make fairly substantial adjustments to your contribution rate every month in order to catch up the lost ground. Otherwise you fall so far behind that you will be forced to work longer. I would almost go as far as to say that thinking that you can save for retirement for only 30 years is impossible. So if you’ve neglected the first decade of your working career, you are probably going to be forced to work until you are well into your 60s or possibly your early 70s.
RYK VAN NIEKERK: Does the adjustment only affect your contribution or could you actually tweak the asset allocation within that savings product?
JACO VAN TONDER: Ryk, in theory you can tweak the asset allocation, but most retirement funds nowadays, where people elect to invest in the default options, pretty much already give you the maximum exposure to growth assets like equity and property that is allowed by law, which is about 75% or a little bit more, depending on how you count them. So it’s unlikely that by tweaking the asset allocation you can improve the result. If, for whatever reason, you’ve elected a really core investment option but a very low growth asset, then sure, please put that back up as high as possible. But for most people the solution to a shortfall in retirement assets isn’t really in trying to optimise your portfolio. Maybe you can tweak the costs by purchasing a product where the fees are maybe a little bit lower, but the real magic comes from additional contributions – there is no easy way out.
RYK VAN NIEKERK: But I’m astounded with the impact that a 10-year delayed start would have on your ability to retire, and it shows you again that you need time in the market – that is probably more important than your actual contribution, and you then need to keep an eye on how things are progressing because you can fall behind and you don’t realise it.
JACO VAN TONDER: I fully agree and it’s part of the challenge of the retirement fund industry today, is that we haven’t yet perfected the ability to warn members during their careers how they are doing on their retirement glide path. I think the regulator realises this and that’s why we are seeing much more interventionist regulations targeting how members have to be able to receive basic retirement fund counselling to help them with planning this trajectory over their working career. So there’s a big push from the regulator to help the interventions to happen early, but at the end of the day there’s no substitute for people taking responsibility for their retirement fund savings and I think that is the key message.
Track the performance of savings
RYK VAN NIEKERK: Jaco, the core message here is that you need to track the performance of your savings and act immediately if you see any deviation from the original plan because any deviation requires immediate intervention and if you react too late it may be too late.
JACO VAN TONDER: That’s always the challenge. When you’re in your 20s you don’t think about retirement, you don’t worry about saving for retirement and you’re more thinking about how you’re going to spend your bonuses and what you’re going to be doing with the salary you’re earning and all of a sudden you’re independent. I think the whole psychology of somebody in their 20s unfortunately goes against the principle of long-term investing, which is why, in reality, I think for most people retirement fund savings only snaps into focus in their 30s when maybe they start a family and they visit a financial advisor for the first time. But unfortunately by the time that’s happened, as we said, that person has got to resign themselves to the fact that they’re probably going to have to work until they are 70.
RYK VAN NIEKERK: To add to that, I think the single biggest mistake you can make in retirement planning is to take a pension payout when you switch jobs.
JACO VAN TONDER: Yes, and that’s a really South African-specific problem, the fact that our regulations allow you to actually dip into your retirement fund as a way of offering you bridging finance when you’re between jobs. Unfortunately I think it’s a case of sacrificing your long-term retirement in exchange for short-term survival and I don’t think it’s a fair trade-off but I guess that is something that we sit with in our South African regulations. I would venture to say it’s better to rather, when you’re young, try to fight it out, get a new job and not dip into your retirement fund than to withdraw the money and try to use it as bridging finance for a quick three-month sabbatical and an overseas holiday.
RYK VAN NIEKERK: So, Jaco, if I can summarise your guidelines – if you are halfway to retirement or in your early 40s, you need to have saved around five times your annual salary. If you are 10 years from retirement you need to have saved around 10 times your annual salary, and if you are five years away from retirement you would want to see roughly 15 times your annual salary as part of your core savings. This trajectory would mean that at retirement you would have roughly 20 times your annual core salary, which would mean you could retire comfortably. Thank you Jaco, for sharing that with us and thank you for your time.
JACO VAN TONDER: It’s a pleasure, thanks Ryk.
RYK VAN NIEKERK: That was Jaco van Tonder, advisor services director at Investec Asset Management.
Brought to you by Investec Asset Management.