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Retirement education: isn’t this a life skill?

People who understand how to create their own wealth have motivation to optimise it.

There was a time when many South African employers offered their employees guaranteed pensions when they retired.

These were called ‘defined benefit’ pension funds. The defined benefit was usually a formula that promised employees 2% (or a similar percentage) of their salary for every year they worked for that employer. An employee who worked for such an employer for 40 years would therefore receive a pension of 80% of their salary when they retired. The salary figures that were taken into account usually excluded bonuses and allowances. This pension was guaranteed by the employer. The employer and employee both contributed fixed amounts each month to such funds.

Every three years the actuary to the pension fund would value it to see if it had enough money to make good on the guarantees. If there was insufficient money in the fund, the shortfall would be made up by the employer who, after all, had guaranteed the benefits. So they employer took responsibility for the financial risk and the employees knew exactly how much pension they would receive.

‘Defined contribution’ funds mean less certainty

From the late 1970s until now these funds have mostly been shut down and their values transferred to what are called ‘defined contribution’ funds. In this arrangement, both employer and employee make fixed contributions to the pension fund. These fixed contributions are percentages of the individual’s salary. When a member reaches retirement they will only have the amount of money in the retirement fund at that time to retire on. 

So the full investment risk of retirement has now been transferred to the employee. Unfortunately that employee has no way of knowing whether or not they are saving enough to ensure a comfortable retirement. Most assume that the pension fund will see them right if they belong for long enough, but this is a flawed belief at best. This problem extends from CEO to general worker.

Richard Glass, an American pensions writer, put it this way in 2010: “The process workers should utilise in determining their retirement income needs and funding requirements is essentially the same as that used by large defined benefit plans in determining their liabilities and contribution requirements. Unfortunately the average worker is ill-prepared to take on this task. To make matters worse, [they] are unfamiliar with the magnitude of the problem.”

Few even realise that a problem exists

People who manage retirement funds are responsible for making sure that the funds run like clockwork and comply with all legal requirements. They are also responsible for providing members with appropriate information about the fund. That information is not knowledge.

The next logical step for most people is to approach a financial advisor. Sadly most advisors are only interested in dealing with what is politely called ‘high net worth individuals’. Further, financial advisors are neither inclined nor trained to educate people. They may have the finest intentions, but they are conflicted because their income comes from annual fees paid on products they are able to convince individuals to invest in.

Clearly, members must be able to understand their situations well enough to make informed financial decisions. And for this they need education, and especially education from unconflicted sources.

John Anderson, a well-known actuary in South Africa, had this to say in a note published in 2012: “There are insufficient support structures in place to help members make the right choices. Instead of leaving the members of retirement funds to their own devices, more should be done to educate them so that more South Africans can maintain their standard of living in retirement.”

It thus makes sense for education in this area to be provided as an employer initiative.

Teaching employees how to integrate their company provided benefits into their personal financial lives improves their chances of having a financially comfortable retirement.

If individuals understand how financial products benefit them there is less chance of them falling prey to exploitation at their most vulnerable, when retiring or being retrenched.

How does a company benefit from paying for the education of its workforce in regard to the benefits they receive? The answer is simple: engaged employees have greater goodwill towards their employer. They put more effort into the achievement of business objectives.

Rod Burn, former director of operational performance at PPC, actually measured this effect using an anonymous internal perception monitor. Because of the very positive results in this area he remains curious as to why this aspect of training has been so widely neglected.

People who understand how to create their own wealth have motivation to optimise it.

While the basics are simple, and the costs of such education are minimal, and the benefits to both employee and employer are substantial.

* Dave Crawford is a certified financial planner and founder of retirement training firm Planning Retirement.

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Nice article.
The benefits to the employer by providing retirement education to the workforce is very doubtful. Perhaps it would be convincing if there was hard evidence on the negative effects on workforce due to lack of retirement education.

I am very scared of financial advisors and retirement planners for obvious reasons. I believe in Warran Buffet’s advice i.e.”Read, read and read and do it yourself.”

Agree but up to about 10/15 years ago before MW there was nothing to read or compare about retirement except the Sanlam and OM brochures-illustrative values- and policy peddlers interested in commission only. Had it not been for MW website & comments I would have still been in the dark.

Agreed jnrb BUT you need to UNDERSTAND what you are reading and apply it correctly. A friend of my has done just that read read read. also lived by buying when everyone is selling and sell when everyone is buying. He told me last weekend that he has halved his capital by buying cheap shares and buying good performing unit trusts. Cheap shares stayed cheap and the good unit trusts from big named companies dropped and others out performed them. what is the answer? use a broker of follow Buffets advice either way you loose. the country needs to turn the corner and start to boom????

@jnrb. Don’t be scared of financial planners…most of them arrive unarmed to sales consultations 😉

As a financial-apt person myself (like many on this site, naturally), I’m scared of what a mechanic does to my car under the bonnet; I also am scared of my local IT-technician….how do I know he doesn’t hack my own PC, or add malware when by desktop goes for upgrade?; scared of my GP-health practitioner…how do I know my slowly deteriorating health is due to mere aging (and stresses of life) instead of unknown possible malpractice/ hidden misdiagnoses of the past(?) I even doubt my local DA-councillor’s motives *lol* Crypto also scares the hell out of me…

Trust only in God, and your 7mm Mauser! (…or an AR-15 for the younger generation amongst us)

This is why countries like Japan, Korea, China, Taiwan insist on teaching kids at school about basic investment and retirement planning.

These high school grads can tell you more about ETF’s than your average retiree in South Africa.

As for SA schools.. well the education ministers are too colonized or too decolonized to bother.

Retirement education can be, local, compared with money, smell following. The news headlines of the past months indicated exact results.
One grabbed million is not news anymore. Above ten respect is due.
Many fellow country men did a good job on providing for offspring and family. In between they regulated minimum wages and grants. Payed in by wealthy tax payers. Socialism the African way can be fascinating.

quote,
People who understand how to create their own wealth have motivation to optimise it.

Watch the movie Godfather.
Showing the way how not to end as having grant rights by retirement age.

Whenever we are confronted by a problem that does not seem to have a solution, we need to take a few steps back, to try to get some perspective. We cannot see the wood for the trees.

It is impossible for people to save enough for retirement if the government runs a budget deficit and has a huge debt/GDP level. On whose behalf does the government take on the debt? On behalf of the citizens of course. Government debt is the amount that is borrowed from the future savings of citizens. Deficit spending and government debt can only be repaid or serviced through the effect of inflation. The same inflation that pays the government debt destroys the purchasing power of the pension fund.

Therefore, you can either have enough pension savings to retire comfortably, with a government that is bankrupt, or too little pension savings with a government whose debt levels are under control. Not both.

It boils down to this – government takes the purchasing power of your future pension savings to finance social grants today. The money has been spent on social projects. The same money cannot belong to your pension fund and the recipient of social grants. Yes, you will receive the money, but the purchasing power has been stolen.

Inflation is a transfer of wealth from savers to debtors. Who are the savers? People with pension funds. Who is the biggest debtor? Government.

Now you understand why it is virtually impossible to save enough for retirement.

With gov being the biggest debtor and getting close to default it’s quick to see why the ANC is adament on changing monetary policy one way or the other. If they change policy from inflation targeting savers everything.. combo that with prescribe assets and I find this article odd.

Retirement these days is not purely about vehicles and types but about considering the political risk. If I was starting out and considering saving right now I’d not put a cent into pension or ra but rather max annual allocation in TFSA and then other investment vehicles.

Thanks for the article and the great work you are doing in helping educate people about retirement planning. I am sure you know about the book published called “The Ultimate Guide to Retirement in South Africa by Bruce Cameron and myself. Your input and comments would be appreciated in helping us add more value to educating our fellow citizens of this beautiful country. For more info visit http://www.retirementplanning.co.za. Greetings Wouter Fourie.

Do it yourself.

Advisors just take fees.

Whether your investment increases or decreases they will still take fees and make you poorer than just putting your money in any bank account.

I see myself sort of DIY financially educated. I am on the brink of retiring and my investment is with 10X. What irked me big time is that they propose a basket of SA UTs as a strategy for my income investment when I retire. Surely, when one activates your pension, you don’t need to adhere to section 28 anymore- why keep your investment still in SA?

Some people/ businesses prey on your feelings of insecurity and this is where we definitely need significantly more education. Sanlam/ OM/ Liberty and the likes – my dog has more integrity.

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