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‘Millennials most at risk of poor retirement outcomes’

Amid job hopping and lack of preservation.

Millennials – individuals born between 1981 and 1996 – are most at risk of achieving poor retirement outcomes, as this group tends to change jobs more frequently than previous generations and generally cash out their retirement benefits when they do.

Statistics suggest millennials will have between 12 and 15 different jobs in their working life on average, says Viresh Maharaj, CEO of Client Solutions at Sanlam Employee Benefits. This was at a media briefing ahead of the official release of the 2018 Sanlam Benchmark Research, its annual retirement study.

“Our contention is that the number one baseline, foundational reason people don’t have good retirement outcomes is a lack of preservation. It doesn’t matter what investment strategy you’ve got, what costs are in play, what type of advice is there, the counselling, annuitisation, nothing. Nothing else matters if you don’t preserve.”

Maharaj said if millennials were changing jobs more often due to the changing nature of work, it meant that they were far more exposed to the risk of non-preservation.

According to Statistics South Africa, this age group represents upwards of 50% of the employed labour force. This is mirrored in Sanlam’s own Umbrella Fund data – roughly half of its members fall into this category.

Apart from the lack of preservation, other factors are also at play.

During focus group sessions that were conducted with millennials as part of the broader research project, one could almost feel the temperature drop when the topic changed from digital engagement to retirement funds, Maharaj said.

Millennials associated retirement funds with negative concepts such as “old” and “aging”, suggesting that they couldn’t relate to the concept or the products they were being sold.

“Millennials do not relate cognitively [or] emotionally with retirement because of the negative associations… and therefore they don’t engage with the process.”

The age group is generally also highly sceptical of the financial services industry as they have seen first-hand how their parents have suffered from poor outcomes brought about by hidden fees and jargon (among other factors).

Maharaj said most millennials started working just prior, during or after the global financial crisis and have had a completely different experience with regard to returns, volatility and institutional reputation.

“They have been fundamentally shaped by living through that experience.”

The controversy surrounding president Jacob Zuma and allegations of state capture and corruption during his term in office, have also fuelled a significant amount of scepticism in government and institutions.

The research showed that millennials believe things would work out, that they tend to be optimistic and that they had a high degree of belief in their own ability to make a plan, Maharaj said.

Of those who indicated they don’t need a financial advisor, 60% said they could do things themselves based on their own research and available resources, but this had to be seen in the context of generally low levels of financial literacy. Even highly educated professionals who are specialists in their field, often had very little understanding of specific issues such as budgeting, debt and compound interest.

While the general advice line seems to be “speak to your advisor”, millennials aren’t targeted by financial advisors, as they generally have a relatively low asset base.

Figures from Sanlam’s Umbrella Fund show that the average millennial has accumulated retirement assets of R42 000. The average value for 37-year-olds is just under R90 000. This is primarily due to non-preservation. 

“[Millennials] are typically left to their own devices. They don’t receive financial advice, are untrusting of financial services, have a low degree of financial literacy, are overconfident in their own abilities [and] are disengaged with the retirement fund. It is a perfect storm that we’ve got going on for 50% of our members.”

To improve the situation, there should be on-going engagement with millennials aimed at empowering them to make better financial decisions. In this regard, technology could be used as an enabler to improve otherwise tedious transactional processes, Maharaj said.

Retirement benefits counselling (as required in terms of the new default regulations aimed at improving retirement outcomes) also presented an opportunity to actively engage millennials at certain important points along their savings journey, for example when they changed jobs.

Maharaj said millennials want to be at the centre of their life decisions, and an approach that appreciates this provided the best possibility of improving retirement outcomes. They do not want to be told what they can and cannot do. Millennials want insight that empowers them to self-evaluate what is in their own interest and gives them the ability to make better decisions.

There is a significant onus on the financial services industry to play an engaged role in helping to create positivity and confidence, he said.

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Ingé, please if you are going to insert humor, advise beforehand, as I choked on my coffee : )

“The age group is generally also highly sceptical of the financial services industry as they have seen first-hand how their parents have suffered from poor outcomes brought about by hidden fees and jargon (among other factors).”

My daughter is a millennial. Her first job had a provident fund which was preserved. Her second job has no retirement benefit and I helped her to start an RA with monthly and adhoc contributions. She has seen the tax benefit by receiving a refund. Nevertheless when she recently got married she stopped contributing due to financial pressure.

Agree that many millennials working in the private sector will be a vulnerable group.

Everyone is vulnerable the cost of living is such (and I don’t have much debt) is killing the nation. We are overtaxed and finding it hard to contribute to a pension and not to mention the returns of pension funds in SA are rather dismal!

By the time millennials need to retire, they will obviously be in political and goverment power, if by then we are still some sort of democratic regime- they will ensure that old age pensions grants will be sufficient to live off comfortably because the majority of the voters will be in favor of this.

Even the offspring of millennials won’t mind being taxed for this because the alternative is that there parents become their financial burden.

By being heavily taxed they are in essence paying for their parents. So they’d be paying either way…

Good read! This is also happening in the US. There will always be a use for a Financial Advisor; to have the motivation to study and figure out what investments will be right for you and the discipline to actually invest in them is a big feat to ask.

However, with the cost of living, it is hard to voluntary save. Employee benefits are a big plus as most employers match savings and it’s is automatic every month so you don’t have the temptation to not make that RA contribution after debit-orders.

Despite the “… poor outcomes brought about by hidden fees and jargon (among other factors)…” suffered by my generation, here is a real life case study (for obvious reasons I won’t mention the institution or the policy number here). I contributed R1750 per annum to a market-linked retirement annuity (RA) policy from 1985 to 2014. It was sold to me on the basis of the R1750 p.a. tax deduction I could get at the time. Every year in February I hated to see the money leave my bank account, but I persisted. If you wondered why the term was 29 years, think full commission. When it paid out in 2014, I calculated the internal rate of return (yes, I know how to do the calc). Over the 29 years it gave me inflation + 4.5% based on the money I spent on it. Could I have done better with the money? Possibly. But chances are I would have spent the money. Yes, look at fees and do not pay more than you should. Yes, you should be sceptical and ask questions. But, do NOT refrain from planning and investing because of your scepticism. You’ll be the only loser.

I too took out an RA with high hopes of supplementing my pension – what a joke on converting to an LA the value was less than the new car I bought 4 years ago. In those days I think it was only the Bellville bullies or the green machine that sold RA’s and their fees were astronomical

All I can say is the average 37 year old should be very worried.Somebody retiring today needs at least 15 million to live comfortably,what somebody retiring in 25 years time needs is anybodys guess, probably ten times that amount!

How do you get to R15M, What is this based on ie. Annual requirement, drawdown rate, whether the capital must be preserved at death or can run out to Zero.
I calculate the R15M invested should yeild an annual income of R600K (R50K pm) before tax – which is quite a lot for someone who’s retired

No it is NOT quite a lot. Factor in tax, medical aid, capital replacement of car, appliances and then add on repairs plus own share of medical expenses not covered by medical aid.

R15 mill too little.

Bruce, if they expect to maintain a R80 000 per month (before tax) income lifestyle maybe, than yes they need R15 millon today.

Someone who wants to maintain a R25 000 per month (before tax) lifestyle would need R4.5 today.

Yes, some people get by comfortably enough on such a figure per month.

Just putting a random figure out there is an act of stupidity.

R50000p.m. is based on a 4% drawdown rate(apparently anything above 5% is risky) and I’m talking about a couple here.If they’re lucky they’ll get away with income tax of R10000 p.m.,a decent medical aid and other medical expenses will cost them the same so before they’ve started they’re down to R30000.How a couple can live comfortably on R20000 after tax is beyond me.The only way they can get by is if their kids are picking up half of their bills and this is what is happening in 90% of cases.

Bruce I agree with your figures. This would assume a living annuity and it means there would be a large legacy for your children. Check what a guaranteed annuity will pay to see if you are drawing too much.
Just imagine if 50% was paid from discretionary savings or an annuity in your spouses name. Also the medical aid deduction helps a lot in reducing tax.

Was scared I was saving too little (still am), but according to this, I am well above the average… Hmm, ok.

Scary but true, I started just after the global financial crisis and I have worked for one company but have changed positions a couple of times. Half of the people I got employed with have left after few years and cashed out their retirement saving to either put them up for deposit for cars or pay consumer debt. Now I’m glad I’ve stayed. Unless the markets collapses again, I should be in more favourable position. I’m one of the people who has a problem with financial advisors, but the more I read on them onmplatforms like this, the more I realise that maybe, just maybe, I should consider one. So far I’ve not done bad by myself.

Hardly surprising really that millennials are sceptical of retirement planning as it stands right now. They’re smart and cynical of retirement products in general, particularly since there is so little need for intermediation in a world of blockchain technology and smart contracts.

The bottom line is millennials will do something about their retirement planning, just not the same ol’ same ol’ that we did with the family broker who sent wine and calendars at Christmas, earned overseas trips from the behemoth insurer, and was another snout in the busy trough that then ensured lacklustre returns from the investment products.

In the future (already happening) there will be little if any intermediation.

Don’t be fooled by the average savings amount. I believe it take into account the high percentage of millennials’that is unemployed. That is where the problem is going to be.

RA’s in most cases are a good investment. If performance is poor do a section 14 transfer to a reputable platform with transparent fees and portfolio’s. Until recently CPI + 6% could easily be achieved. This is not even considering the tax savings. My privately held RA is performing on par with the company pension fund. At retirement the R500k tax free withdrawal will be very helpful.

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