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Millennials aren’t saving enough for retirement – now what?

Millennials need to be empowered with the right toolkit to manage their finances.
If millennials can't be convinced to start saving, the state faces a significant burden in supporting an ever-growing generation of retirees with longer life spans. Picture: Shutterstock

Millennials represent 50% of existing pension funds’ membership base, yet they make up a mere 5% of retirement fund trustees. This statistic from the Sanlam Benchmark Survey 2018 is indicative of why millennials commonly feel disengaged from the retirement planning process and overlooked by the retirement industry.

Millennials have a different set of attitudes and values, and these may not have been incorporated into their cradle-to-grave retirement journey. A recent report by the National Institute on Retirement Security, based in the US, found that only one third of US millennials have retirement savings. This statistic is likely to be worse in South Africa, with its high unemployment rate, high levels of indebtedness and low savings levels. 

How can the retirement industry address this? How can we engage with millennials and find ways to encourage and entrench a culture of savings and investment?

Increase representation

Engaging this demographic will help the retirement industry adapt to meet millennial needs. Millennial members are likely to respond better when they feel that they are being guided by financial advisors and boards of trustees who understand their needs. Fellow-millennials are therefore more likely to influence the investment and savings behaviour of this generation. At a minimum, pension funds should look at whether their boards of trustees are a fair representation of their membership base.

Preservation is paramount

Millennials are likely to change jobs more frequently than previous generations, and are more likely to cash out their pension fund savings when doing so, according to the Sanlam Benchmark Survey 2018, and Deloitte Global Millennial Survey 2019. This is perhaps the most critical issue the retirement industry needs to address. Pension fund trustees need to ensure that members understand the long-term implications of their decisions.

Although millennials may be highly educated, they often have low levels of financial literacy with regard to savings, investments, managing debt, and budgeting. In short, they often lack the toolkit to make sensible and empowered savings decisions.

Retirement benefits counselling can help at the point of retirement. Recent amendments to the Pension Funds Act recognise this important decision node. The amendments make it mandatory for retirement funds to ensure that their members receive retirement benefits counselling before making a decisions on their post retirement options. Members, however, would also benefit from ongoing counselling throughout their retirement journey. It is crucial that millennials’ voices be incorporated in the design and implementation of this type of financial education.

Address the trust gap

This generation has lived through the fallout of the global financial crisis. They are generally mistrustful of financial institutions, including traditional pension fund solution providers, financial advisors and consultants. A 2019 millennials survey by Deloitte found that 83% of respondents in South Africa believe business is driven by profit, not by considerations of what is good for society. When attempting to engage millennials, who are motivated by a strong social conscience, this is an important consideration in engendering trust. Some 29% of respondents in the Deloitte survey indicated that climate change, environmental protection, and mitigating against natural disasters were important considerations in deciding how to invest. In South Africa, 53% of respondents indicated that companies needed to address inequality. Social issues matter to this generation, and they are more likely to invest with a company when they believe it behaves ethically and responsibly

Re-think retirement solutions 

Millennials are perhaps more open to what has traditionally been viewed as ‘alternative’ investments.  Niche and focused products, which are aligned with their preference for ESG factors, are more palatable to millennials.  They are also more accepting of new technology, including the use of artificial intelligence, machine learning and robo-advisors alongside human knowledge to structure and implement their investment portfolios. A further important consideration is that millennials, much as the generations preceding them, do not wish to be faced by multiple decision nodes and complex solutions. The move toward default options and toward in-fund annuities is therefore a step in the right direction, but the design of these options needs to take heed of the millennial voice.  

Millennials are expected to have longer retirement years, as medical advances and lifestyle changes continue to prolong our lives. If we can’t convince this generation to start saving, the state faces a significant burden in supporting an ever-growing generation of retirees with longer life spans.  Millennials who receive retirement benefits counselling and investment advice in relatable, easily digestible and contemporary form, can make informed decisions about their money.  This will allow them to better preserve their pension pot, so that it truly travels with them for their full retirement journey.

Fran Troskie, is an investment research analyst at RisCura.

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Before Otto von Bismark there was no such thing as retirement.

His idea? What is the life expectancy of a man in Germany – 66; well then, they can retire at 65. This gives them 1 year to get their affairs in order.

Today we have the fantasy of retirement at 50 and then living to 90. For a brief window, and for a lucky few, this has seemed possible because of booming stock markets and an influx of new workers to support a small base of retirees – a classic Ponzi scheme.

These conditions were never going to endure. Now we have a burgeoning of retirees as baby Boomers turn 65 and millenials struggle to support themselves, never mind all the boomers. Interest rates are negative in large parts of the world and there is no safe place to build a retirement egg.

Globally, retirement funds are short of trillions and the boomers are about to see their comfortable retirements go up in smoke. This breaking of the social compact in places like the USA is going to have massive implications as governments resort to money printing to keep the compact alive.

As for the poor millenials, their retirement plans are going to look a lot more like Otto von Bismark’s original concept.

Meantime the retirement industry still pedals the nonsense that you can save enough for an extended retirement.

Do the math. You work 30 years from 25 to 55 when you early retire. You save 10% of your income for retirement if you are lucky (retrenchment, market crashes, costs of bringing up a family, and fees skimmed by the retirement industry take care of most people’s nest egg).

This 10% saved will keep you going for about 18 months at the level of your final salary – and that’s only if you’ve been able to invest at a return that matches inflation.

So no. You won’t retire at 55 and live to 90 in comfort. And the millenials sure as little apples won’t do it either.

That’s not to say that a very small percentage won’t manage it, but they’re business owners, landlords, trust fund kids and the like.

Navigator :

Spot on! Defined benefit is basically what most western pensions are built on, but analysts did not figure in 35y or more of post retirement benefit. Virtually all the great western social benefit schemes are bankrupt using basic actuarial math. They were OK when there were more 35y olds than 55y olds, but population pyramids dictate that western systems are going to have to find a way to live off the emerging economies that have fat bottomed pyramids.

If you are a retiring French or English or German school teacher, you are in far deeper trouble than a 25y old teacher. But you are in less trouble than the old French, English and German politicians

Excellent comment Navigator!
It will be interesting to explore the impact of this reality, as stated by you, on fiscal and monetary policies of governments. Japan is an example of how monetary authorities can capitulate and print money in the face of deteriorating demographics. Inflation steals the purchasing power of retirees, and that forces governments to increase inflation.

>> Before Otto von Bismark there was no such thing as retirement.

You are wrong. The Muslim world traveller Ibn Battuta, during his visit to China then under the Mongols (in 1345 FFS), wrote of them using paper money, and granting working men a pension in their old age.

Its amazing that the Mongols could find it in their hearts to support in their old age and infirmity those who had had already contributed to society, but modern capitalists can’t.

Modern capitalism/mercantilism has just become heartless feudualism.

Don’t like the truth, Moneyweb? Those of us who have lived a frugal life and saved for our retirement are sick and tired of being branded as heartless capitalists. I don’t know anymore why people are being encouraged to save, as having savings apparently makes you guilty of some sort of crime and you need to be relieved of that “excess” money fast. Those on the other hand, who lived the life of Riley, and are left with nothing, should benefit without merit nor criticism.

Best not to save at all for retirement?

What is your solution? Give up.

No you cannot work forever.

You got that right. Saving is a crime in Africa. It gives you an unfair share of the “limited good”, which Sensei explained so well to us in previous articles. So just live it up!

Very inaccurate! The Roman army gave out pensions BC!

I don’t know where people get this nonsense from and definitely didn’t bother reading about ancient history

I am always amazed at how they try to sell youngsters retirement annuities. They will pay HUGE amounts of interest on their cars and homes. Whilst making a pittance on their R.A,’s You should just fund your Provident or pension funds. A million Rand bond equals R 10,000 A MONTH interest the first 5 years. That’s where you should be investing. Paying off your debt 1st is some of the best suggestions I can make. Dr Debt!Don’t forget the children you are going to have and need school fees.

100% Zokey and comments below. It always amazes me how “concerned” these big profit machines under the guise of “financial management experts” are about the average mans financial literacy, with the only solution being we hand over our hard earned bucks to them. Surely if the masses are so financially illiterate the solution would be to promote financial education schemes at school level? Or provide training seminars for adults etc? But then again, the more financially literate the masses become, the more redundant these companies are.

Zokey: the bulk of the money is in the major countries. A typical german mortgage on a €250k home with 10% deposit amounts to €540 a month. Affordable. Except millennials cannot afford it and for what it implies as a return on investment for the pension funds to fund those mortgages that must in turn fund defined benefit pensions of a retired Mercedes Benz worker for the next 35 years. All that keeps this house of cards up is low official inflation rates, IMO. That, and the prayer that enough old people die sooner rather than than later so that the number of pensioners can drop down to the number of workers.

I am fairly certain that the cost of debt has to increase, but nobody can face that consequence

Saving is the least of their problems. Getting a job is. Only way to do that is change the government and move away from the socialist and populist rhetoric.

Else don’t worry about saving get out.

Exactly. It is an extremely unattractive proposition to save for your retirement, with the sword of the cadres wanting to take your pension money and putting it into SAA and Eskom hanging over your head. Young people should not be investing in RAs. They should be doing everything they can to get their money and assets offshore. At the very least, avoid RAs completely and invest in 100% offshore unit trusts.

According to the thumbsuck definitions that I’ve seen around, I’m a millenial.

Not saving money in retirement funds does not mean not saving for retirement.

The retirement funds that I have been in since the start of my career have returned pittance. So after my first 10 years of saving for retirement, I decided to do it myself.

I currently make more retirement savings in one year that my first 10 years in retirement funds and the subsequent returns on that in preservation funds combined.

So why should I be in anything that is called a “retirement product” when I can opt for other options that have costs (fees) that are always less than 50% of those “products” and return multiple times more EVERY SINGLE YEAR?

I am in the same boat, I got my first real job 4 years ago along with a RA.
Over the past 5 years after fees I have received almost nothing.
In fact there was a moment last year where after 3 years of contributions my RA value was actually less than my contributions.

But the only reason I have the thing is because its company policy, sure I can move it to lower cost providers like 10X, but since I am planning on emigrating anyway in the next 5 years I am not even going to bother.

My DIY investing on the side has yielded much better results than my RA.

Maybe, just maybe millenials have little trust in the traditional retirement industry (i.e. life insurance companies with their punitive products and ptoduct salesmen) – seeing how their parents have been shafted by these leeches?

Probably this boils down to something really simple: People who are fortunate enough to have employment, who want to retire securely, probably will. There isn’t much else that really matters. The most important ingredients are BASIC knowledge and HIGH discipline. In terms of the method to get there (RA or something else), that is secondary.

My personal opinion on what I would recommend: I would be hesitant to recommend an RA product for a young South African – besides excessive costs, the swinging factor to me is that it puts constraints on your money, and these simply do not outweigh the tax benefits from my perspective, especially in our local environment. I agree, the debt must go first. After that, simple, offshore unit trusts (or asset swaps if you prefer). You cannot as a young South Africa with 50-60 years ahead of you bind yourself and your assets to the Rand and 1% (I guess) of the investable universe out there.

If at age 40 you have no debt on your car and home then with or without a retirement fund you are very, very successful already. Further savings will then enable you to invest into profitable investments result being a interesting and happy retirement.

So investing all your money in some RA fund

locked up for ~30 years,
with only 25% allowed offshore,
with penalties for early withdrawal

is a good idea?

You mean while SA is on the slippery slope into the financial abyss with hyperinflation potential and your savings locked up losing value?

All Saffers regardless of age should be moving money out, not locking it in.

I’ve had the privilege of advising people on Investments (Retirement) and Insurance products for almost 30 years. Apart from being underinsured the most common problem is that of people not being able to retire financially independent. The big commissions and costs with retirement products have almost been completely eliminated.

Simple maths dictate that when given time (years) nothing beats the power of compound growth. When this is combined with the tax efficiency (tax deduction, and favorable tax at investment level) a retirement annuity is a no-brainer.

The bigger problem is that of our youth having the ‘invincible’ attitude which inevitably leads to the problem at retirement.

Get a good financial advisor who’s able to explain all the rules and calculations before it’s too late.

As long as you point out the following:

1: The impact of paying off debt sooner compared to additional RA contributions. Do not show equity returns on the JSE over the last 20 years as guideline.

2: The disadvantages of having your money locked-up and susceptible to all sorts of rule changes.

3: The disadvantages of being constrained on asset class and offshore investments. You should mention that an RA forces you to invest 75% of your money into 1% (?) of the investable assets out there.

4: The only advantages of an RA are: Tax benefits and that it can force a discipline on people who need it. There is absolutely no guarantee (at all) that the tax benefits will pay off compared to alternatives, especially getting rid of debt.

May I also please share a calculation here (using round numbers below in calculation results – just reads easier than exact numbers.)

Suppose we have:
* R1m debt
* 10% per annum
* 25 years to pay down
* We have additional R5k per month that we can decide to do something with.

If you pay this debt off without extra contributions:
* The total interest payable on the R1m debt (over 25 years) is R1.65m.
* The total interest payable on the first 9 years is R825k.

If you take the R5k per month and pay it off extra on the debt:

* The debt is paid off after 9 years.
* You have paid interest of R500k over the 9 years.
* You saved yourself about R325k in interest over the first 9 years.
* You saved yourself R1.15m in interest in total.
* The interest savings are not subject to any tax, at all.

If you take R6k per month (loose equivalent of R5k per month taking into account tax advantages and typical RA fees) and put it into an RA:

* If the RA returns 10% per year, every year,
* You have R1m in your RA after 9 years.
* You still owe R850k on your debt.
* You will still pay about R825k in interest in the last 16 years.

A big, big difference here is that the saving you obtain on your debt (by putting extra R5k down there), is 100% guaranteed, tax-free implicit gains. What are the chances we see 10% growth, every year, over the next 10 years?

The case couldn’t be clearer.

Again, as I said earlier … the key factor in my opinion is if people have the discipline to put that extra R5k (manually) down on the bond and not take it out. If you can have that discipline, you are miles ahead and better off.

Something often overlooked as well on this topic is the cost of insurance. By putting money into RA and not down on debt, if the RA doesn’t perform, you potentially sit with large amounts of additional money that may have to be paid to insurance premiums. When debt is gone, you can also control your expenditure on insurance much more. Note that insurance premiums can become very expensive as people age, adds up to big amounts paid over time. Most of that (typical) insurance premium actually goes to paying commissions, expense and profit margin. (Similar to a bank where most of your payment goes to interest.)

A no-brainer? Really? Don’t you read the news about the ANC’s manifesto wanting to force RA and pension funds into prescribed assets, i.e. Eskom and SAA? Don’t you know that the JSE has been suffering since 2011? What will happen to your RA when SA’s rand goes into free fall, but your insurer can only invest a small percentage offshore?

Typical salesman talk at work here. RAs are the worst thing the young can invest in.

Ben K. I quote….” the big commissions and costs have been eliminated” (end quote). So by your own admission you spent a good part of your 30 years ripping people off…and now we should all trust you!!! Your comment and arrogance is the exact reason people avoid your industry like the plague. Rather beg for forgiveness and repay the money which gullible savers gave to you and your ilk over the years.

This resonates with me having been ripped a new one in my naive twenties by a sneaky salesman on something that matured at a princely R500k odd which, back then, was huge money. These legalised shysters scammed government into getting favourable rules, then ripped people off for decades. My advice to millenials; invest in your qualifications to become a world citizen then invest only in first world stable country currency classes.

Compound growth? Inflation is also compounding, but it’s against you

Well said!

BenK, you say “a no brainer”. Have you run models where you compare your future returns of your RA, which Asset Allocation is prescribed by Regulation 28, vs a non-tax vehicle where you are free to determine your own allocation?.

Yes on the one hand you have tax deduction, and tax free growth, but an income tax liability in the future, not only on your real growth, but also on your inflationary growth.

On the other hand you have capital gains and dividend withholding tax.

You will quickly see how asset allocation quickly beat tax breaks. And with that 70% SA limit, you need a lot of tax breaks only to keep pace with a conservative discount between your assessment of your SA growth vs offshore growth.

So first do that, before you say “a no brainer”

wow, an insurance salesman finding that his customers are underinsured.

I wonder if the lady working the McDonalds counter finds her customers are hungry.

This is the logic of the government schooling system.

Fin-advisers trumpet the R500,000.00 lump sum, when retirement begins

Fin-advisers keep numb on the restrictions of RA’s, the section 28 “corrals” your RA subscriptions, generally into local investments
Fin-advisers keep numb on the fees allocated to managing the RA (including their % from the pension fund house). High fees impoverish the invester over time and enrich the asset managers and FA’s
Fin-advisers keep numb that a TFSA is tax free on all fronts like your lump sum from a RA of R500,000.00 but will continue to compound earning a greater amount

And the TFSA can have contributions made from other investment dividends

So why does anyone even consider a RA especially since if you get hit by a bus the fund house keeps all your contributions and not your family

Am I missing something here: If I use capital to pay down on debt, I know that I save a staggering amount of interest in the long-term. If I put capital down to an investment, I know that I can make lots of interest on that money in future. However, interest I make from my capital by investing it, is taxable. Nobody can tax me on what I saved in interest by paying off debt. So how is a RA the most tax-efficient savings vehicle around? I don’t get it.

Maybe it is because a bond pay down last less that 20 years and other long term investments including RAs last to well, your whole lifetime?

Promise me an interest rate that’s on average within the range of interest rates charged on debt then we can talk.

I got a statement on my provident fund and when I compared the value of my fund portion to my total contributions to date I get a difference of R1000!!!!, when I asked the fund adviser he said because the fund invests mainly in preferred assets.
Now tell me why am I not better off paying off my debt and doing it my own???

God knows why investment returns are lower than debt returns because even with collateral these institutions won’t offer a debt interest rate of 6% but yet we are supposed to be over the moon when they guarantee this rate on your investments.

Now what? Nothing. Financial advisors are done.

My 2 cents worth:

Increase bond repayment before high interest debt. The cost of downgrading or losing a property is highly destructive both financially and physically. Get well ahead of the game as far as monthly payments go (like 3 years at least) but to neglect current long term investments till after the bond is nuked is risky. No one knows what the future holds. Oh yes…….a house is not a retirement plan, it is a retirement home plan.

Put liquidity before profitability

Have never heard of anyone advocating putting all ones savings into RAs. Be careful, very careful of advice to ignore these. The limit on ease of access is an advantage for most people, because most people are undisciplined. Tax deferment is useful and the biggest advantage is that your creditors cannot easily get at your money. RAs have a place.

Never, EVER use an access bond.

Easy to adopt a hybrid approach with a mix of rapid reduction in debt, followed by a conservative approach of other types of investment vehicles.

Be appropriately liquid at all times. Repeat, repeat, repeat …….

Don’t worry the ANC will take everyone’s pension so you won’t be alone with this

Lots of clever comments, lots of different opinions. Even a suggestion that advisors need to beg for forgiveness after having ripped off clients.

Yet, despite all these clever alternatives and calculations, most people cannot retire financially independent. Despite all the negativity, the broker is the first person to be called when a loved one passes away. Retirement planning is not all that we do but remains a very important part.

The South African Financial Services Industry is just about the most regulated ‘industry’ in South Africa, if not the world.

Proud to be part of it for so many years. I’ve seen the difference that proper planning makes.

It’s a no brainer.

Arrogant to the end; deny, deny, deny. My retirement investment opportunity went down the drain with the rip off RA from thirty years ago. Now look ahead into the SA economic disaster and advise me where these self serving “advisors” are going to conjure up retirement income for “millennials”? Fool me once.

The article’s heading inmplies that South Africans (in general) are not saving enough.

Yet, one reads elsewhere that SA has the 8th biggest pensions pot in the entire world. For such an insignificant country, to have the 8th largest savings…..we MUST be great savers in global terms.

How do you reconcile the two? Are Saffas great savers or not?

And, on this same website, it has been reported in the past that 2/3rds of All residentially zoned properties have no mortgage.

But I guess it’s like our schools. You get great ones, eg Paul Roos, and poor ones, so our average looks horrible.

I have once read an investment idea stating that 10% of your income is yours to keep. It is absolutely amassing how much capitalization that creates over 20 years providing you are the only one doing the investment advising.

End of comments.

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