Retirement as we know it probably won’t exist in 40 years. Most workers won’t be permanently employed but will work on short-term contracts.
There may still be tax incentives to save for retirement. But who will do so if there is no longer a personnel department making regular deductions on your behalf?
There have been some interesting recent surveys of people’s expectations of retirement — admittedly by companies with a vested interest in increased retirement savings.
Chris Eddy, an investment specialist at discount pension fund administrator 10X, says that after 40 years in most pension saving plans, pensioners can expect to end up with 60% of their final salary to live off. After 25 years it would be just 30%, yet 40% of people in the 10X survey still believe that it will take 25 years or less to save for a comfortable retirement.
And Eddy says that aiming to retire before 60 means a double blow for your finances: you will need to save more of the capital you had planned to spend in your 40s and 50s, say, and then those savings will have to last longer, for your greater longevity.
Thankfully, there is no obligation anymore to start drawing down pensions or retirement annuities the month we retire from our final employer.
Eddy believes that people will understand their choices a lot better if they engaged with financial kits and calculators available for free online. Personally, I think he is being naive. I, for one, am certainly not rushing out to read the regulator’s toolkit for trustees.
The "Just Retirement Insights" report, produced by retirement income specialist Just SA, shows that 25% more retirees are now less willing to take risks with their money. Having seen how well cash has done against equity and property, it is not surprising. But with cash giving 3.2% at best, it doesn’t look like a great strategy for the next few years.
Cost matters
The cost of your investments is crucial too. Eddy says the discounts that 10X and a few competitors offer make a serious impact. Large insurers tend to charge 3% a year for their retirement annuities: 0.75% for advice, 0.25% for administration, 1.5% for investment management and 0.4% for VAT. Over 40 years, the difference between a 1% charge and a 3% charge makes a 50% difference to the final payout, he says.
Bjorn Ladewig, a leading longevity actuary at Just SA, says: "The increased desire for income security has been heightened by the uncertainty surrounding Covid-19 and its impact on the global economy."
More and more people are affected by and concerned about poor investment returns, he believes. And South Africans who are now retiring are likely to find their assets worth about 15%-25% less than they would have been in normal investment conditions.
According to that survey, the percentage of respondents who set goals and plan their financial future has risen 10%. But the number of people in the 10X survey who have no financial plan has increased from 46% to 49%.
Historically, retirement income products were limited to a choice between an investment product, in the form of a living annuity, and an insurance product, in the form of a guaranteed life annuity. Ladewig suggests that a blended annuity allowing for a suitable combination of income and growth could be the answer. And this happens to be Just Retirement’s specialist area.
But how many people will listen?
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