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.”
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.”