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People save little, but have high expectations of retirement income

Highlighting the importance of awareness and careful planning.

A recent survey by Just Retirement Life found that more than 60% of the respondents have less than R1 million in retirement savings, but quite high expectations about the income they will be able to draw from it in retirement.

The industry ‘rule of thumb’ holds that for a sustainable retirement – one in which your money will not run out on you – a person can expect R4 000 per month for every R1 million of retirement savings.

In terms of the survey, however, the expected income is R8 000 per month.

Just CEO Deane Moore said at a 50Plus-Skills conference in Johannesburg that the rule-of-thumb drawdown rate for people between 60 and 64 is around 5%, however the expectation for people earning less than R1 million is a drawdown rate of 16.5%.

People with the same retirement savings, but who are aged between 65 and 70, have even higher expectations. They expect income from a drawdown rate of 20.5%, when the recommended rate is around 5.5% (for a male aged 65) and 5% (for a female aged 65).

Moore says South Africa has experienced a bull market for many years where investment returns were north of 15%. After the global financial crisis everything bounced back quickly, but in the past five years investment returns in the market have flattened.

“Typically, people would expect returns of 4% above inflation [which is currently around 4%] in their investment portfolios. If we look at what they actually got for the past five years it is below that.”

Read: South Africans continue to work in retirement

This means people who have been saving for retirement should now be expecting around 15% less than what they were expecting it to be five years ago.

“They are hitting retirement with less money.”

In the survey respondents were asked what percentage they could afford to lose before it seriously impacts their retirement plans, and 40% said they could not tolerate any fall in the market.

Despite this, Moore says many people are invested in retirement products where they are exposed to the volatility of the markets.

“While most people prefer a stable income in retirement and cannot tolerate the risk of a decline in investment markets, the majority of pensioners are exposed to these risks in a living annuity, drawing an unsustainable level of income.”

A key takeaway, he adds, is to make every rand count when people reach retirement.

Retirees should consider three ‘buckets’:

  • One is to ensure that their essential expenses are covered (accommodation, food, transport, insurance and medical costs).
  • Then, to allow for more flexibility during the transitional stage when they move into retirement, some money for travel and leisure.
  • The final bucket relates to leaving a legacy, bearing in mind that having an income that lasts and leaving a legacy for children are often opposing ideas.

People often neglect to consider longevity or their mental health in terms of dementia and Alzheimer’s disease – this applied to more than 40% of respondents. Almost 70% thought their health was “above average”.

“Our key concern arising from this latest study is the high proportion of people approaching retirement who have not saved enough, yet expect an unrealistically high level of income from their existing retirement pot.”

Moore adds that few people realise that they can sustain a 2.5% per annum higher level of income in retirement, and guarantee this for life, by using a life annuity or a lifetime income option within a living annuity.

“It highlights the important role of careful planning to help make informed decisions around the effective use of limited resources.”

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COMMENTS   29

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I thought the 4% rule is the way to go?
I think I will stick with the 4% rule.
But it seems as if someone is trying to push for life annuities.
Nice advert though.

Why don’t South Africans save? Because they are obsessed with cars. The first thing which every Tom, DICK and Harry does with some extra money is to go out and buy a brand new BMW 3 series…

Yes, this is why they sold a whole 274 in a month. Of a new model. Every tom dick and harry right.

Why don’t people save? Very simple: those who don’t work for the government, don’t get increases that match the cost of living increases. There is an article here on this site that says that a large percentage of top professionals don’t expect to get increases or bonuses this year. Then factor in the above-inflation increases in taxes, electricity, fuel etc, and pretty soon even formerly relatively well-off people just get poorer and poorer every year. This is not unique to SA. Even in the US, the income of the average salary earner has stagnated for many years now.

This is unsustainable. People are scared of the unemployed who may rise up, but revolutions are actually started by the middle classes.

Another comment: with the increase in life expectancy, people are retiring far, far too soon. People are living longer and staying healthy for far longer. The only reason to stop working is if your health can no longer sustain you working.

Incitatus, You are surely not serious….. “The only reason to stop working is if your health can no longer sustain you working”.

Please don’t think like that there is so much better things to do on this planet than work. Im outa the working system as soon as I can, and not a day later. What am I going to do………travel, walk the Camino again and try the Appalachian trail, Drink Raki in Crete, drink Zurito and eat Pintxos in San Sebastian.

Do not live to work, rather work to live……

Get real. The average working person cannot, even while he is in his prime working years, buy a plane ticket to Spain or the USA, let alone afford food, accommodation or entertainment while he’s over there. And you can maybe walk the Appalachian Trail once, and the El Camino once when you’ve retired, and then?

Well Onion, I hope you have a stack of money to finance all this walking, drinking and eating you are planning to do.
Just stick to the 4% rule. OK?

That is not what he is saying. He is saying that is the only reason why people can retire now. Obviously. You will be too old and vrot to do most of those things FYI.

Good luck, I have heard and seen this argument for so long and everyone ends kind of poor.

Incitatus, Chris Stoffel and Hatchmet, “In the end these things matter most: How well did you love? How fully did you live? How deeply did you let go?” – Buddha. I like to ad another – How often did you truly laugh?

Life isn’t about working yourself to death or some silly 4% rule, life is about living, you could be gone tomorrow.

PS Incitatus, El Camino is a car…..

See you on the flipside.

That’s what socialism gets you…. high expectations of free stuff ad nauseum, as infinitum!

Well the ANC’s “our people” are in for a rude shock because their communist benefactors are bankrupt as of now, never mind when you plan to retire and feed of “grants”.

Well the annuity market is also part of the problem, I assume there are big profits being made in the background because the amount people get currently is ridiculous.

Well of course. The 4% rule is actually a 6% rule with a third going to fees. Or worse.

Why save if government has its sights on stealing your retirement money and/or it can all be lost due to the catastrophic mismanagement of the country’s finances?

Because if you do save at least you will have something at the end of the day. If you don’t save you will end up living in a storm water drain sleeping on a cardboard box.

Erm, all those Zimbabwians who religiously saved are now sleeping on cardboard boxes and living in drains, last I heard. They have nothing at the end of the day, due to government policies.

I agree, Griet. People don’t play sports when they realise that they will lose each and every game. People only participate if they believe that they stand a chance to win. The savings game is rigged against the majority of society. The combined forces of expropriation, namely inflation, income tax, VAT, Capital Gains Tax, municipal rates and taxes, and eventually estate duties, takes a large chunk of our assets. The government basically makes it impossible for you to transfer any assets to your children.

Then there is another, even stronger force by which the government expropriates our savings. This is the devaluation tax. The purchasing power of our savings does not keep up with inflation, but we still pay CGT on those investments. This is a tax on a tax.

That is why people don’t save. They simply decide not to save and to use the default option – go on the social grant system, and use the funds that the governemnt has stolen from those who are brave enough to save.

….so very true

One kid in Canada on the Canadian TFSA (unused annual allocation can be carried forward) and another kid in the UK on the ISA, only because government pensions are being tightened up

..the strange thing is idle “benefit-ers” in both countries score all round. Why save …life is short is there moto

With regards to the comments on Travel.

This seems to be an obsession due to the narrative around this. Many examples “walk the Camino again and try the Appalachian trail, Drink Raki in Crete, drink Zurito and eat Pintxos in San Sebastian”, …………etc.. let us not forget photo’s of touching heads with the locals.

The reality is that travel is not like this (these mac and cheese moments are only moments), more like long haul flights overnight, passport control, customs, taxi transfers, bad hotels all coupled in with a few rude individuals and most importantly in retirement being reamed at tourist hot spots and at every other opportunity.

A family member is in the hospitality industry and it seems that a lot of this travel is done with high risk later in life as a number of retired travellers even do this when very ill.

The cost / risk versus return in retirement is not worth it.

Yes! Most of those people are in too bad condition to even stand before they retire and they want to do 2200 km hikes. The reality is very different. Look at the stats of old people still participating in road running. The drop off is remarkable.

Get it done now. The only thing you will likely be doing in your retirement is driving slowly in the passing lane in rush hour and looking for your purse as slowly as possible in the WW queue (also curiously at peak time).

Okay mrjones If you approach life with – The cost / risk versus return in retirement is not worth it attitude.

I can see island hopping across Greece with your 23 year old daughter would not appeal to you.

You stay at home I will continue traveling.

7 years is the best most people will have of their savings and pension. Inflation destroys capital to 50% of original value within 7 years. No one can really survive, just on pension or interest. The first few years is honeymoon, but soon you will be shocked with how expensive life become. It is not the government, banks or whatever excuses people can think of, except inflation. Inflation kills value so quickly, so drastically and most “wealthy” people do not escape this. Keep working, keep earning some income until or as near as possible of death is the only way to try to survive.

Obviously you mean SA inflation. In honest, civilised countries this is not the case. SA “investments” should be quoted in US$ or Euro’s only, after tax. Anything else is just smoke and mirrors; lies really.

You right, SA inflation.

It’s not that we don’t save, it’s rather that we don’t save enough and the last 5 years of no growth on the JSE has made things worse.Apparently the average person with an annuity only has about 30% of what they need.The average couple retiring now need between 12 and 20 million to live comfortably, an impossible task for all but the extremely wealthy!

The 4% rule yields R3,330 per month per million before tax. If you are paying 18% effective tax rate that’s only R2,700 after tax. Someone who thinks they are going to sustainably net R8000 per month per million must be mad… I would suggest anyone nearing retirement get hold of a good online tool and carefully calculate just how much capital you need. Remember the higher the number the more tax takes its toll.

Financial security at retirement is a function of politics for the average employed person. Government has full control over the rate of inflation, the income tax, CGT, municipal rates and taxes and where the average person invests his pension. Young people can burn tires, throw stones and burn down libraries and schools. Retirees are well-behaved and law-abiding and do not join protests. What would you do in this situation if you were the government? The government uses the powers bestowed upon it by the legislator, who represents the average voter, to shift purchasing power from the pensioner to the entry-level worker and the unemployed. The government takes from the pensioner and gives to the unemployed.

The voter has full control over this process. This is why we should choose our fellow voters wisely. They are the ones who determine the purchasing power of our pension savings.

Financial independence is not based on income but rather on expense. If before the age of 40 you have no mortgage or rent payments and zero other dept, R 10 000/month is a far better income than being over indebted with an income of R 70 000/month. Think of all the tax, interest, and other expenses the R 70 000/month sucker has to incur before budgeting for his basic needs like food, and clothing. Therefore the ability to travel to foreign places (as mentioned by some above) is not about doing it but rather the concept of “if I want to go today I can do it without crippling my monthly income”. The only way to gain financial independence is to control your spending and you will have some savings left which will enable you to venture into sensible investments.

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