According to retirement studies conducted(10X Investments), only 8% of the economically active population will retire comfortably. A comfortable retirement is classified as being able to earn 75% of your final salary from your investments. This is called the replacement ratio.
This means that a person earning R10 000 a month in their final year of work, should be able to earn R7 500 a month from their investments, in order to be classified as 'comfortably retired'.
The reality is bleak for South Africans. The current income replacement ratio is estimated to be around 12%, a far cry from the 75% comfort threshold, as well as the 70% global average. This means that a person earning R10 000 a month is, on average, earning only R1 200 a month from their savings and investments.
The low replacement ratios can be attributed to the following, in no specific order:
Lack of savings/investment contributions
Low monthly contributions
Conservative asset allocation
Accessing pension funds when resigning or changing jobs
High management fees of invested funds
Retirement Age and Life Expectancy
The retirement age in the public and private sector usually ranges between 60 and 65.
Retirement Annuities can be accessed from the age of 55, while workplace pensioners are usually accessed when the employee leaves their place of employment(retirement age without penalties)
Combine the retirement age with South Africa's life expectancy of 60 for males, and just under 66 for women, there is a very good chance that you might not even live to enjoy your retirement savings & investments. What does this mean? That you shouldn't be saving for retirement?
This logic, believe it or not, is used by many people to rationalize not having any retirement investments, or to live life with a YOLO mindset.
Modern Life
During the working days of our grandparents, it was not uncommon to hear that they had worked at the same company for their whole lives. Workplace pensions with defined benefits were common. Not much motivation to change employers.
Fast forward a few decades, the average tenure at a job is less than 3 years, a retirement has a lot to do with what the employee contributes to it, there are side hustles and gig work. There is the early retirement (FIRE) movement. There are market crashes that are making more frequent appearances.
Over the past few weeks, the biggest companies Twitter and Meta(formerly Facebook) announced staff layoffs. Locally, Sibanye Stillwater, SAPO, MTN, MassMart have also used the process to reduce costs and improve the overall effeciency of their operations.
What do you do when you are retrenched? Should benefits of retirement savings & investments really wait until you retire before you can benefit from them?
Well, at least with pre-tax contributions you can access your funds when you are unemployed, but with Retirement Annuities, no matter how difficult your financial situation is when you become unemployed, you cannot just access those funds discretionarily. You could be unemployed, close to losing your home while having a R3m retirement annuity that is of no benefit to you in any way, shape or form. That's just messed up.
The inflexibility of retirement investments actually beg the question "are they really worth it?" Yes, you get the tax benefit, but are the benefits really worth it? Is it really worth restricting your money to being invested in a certain manner, with certain limits, pay a lifetime of comission, an arm and a leg's worth, being dictated to how to use that money, what pace you should use that money at, and the only 'products' you can use that money on.... Is it really worth the tax rebate?
I appreciate the good role that retirement investments play. There are individuals who cannot be trusted to be in the same room with their money. A good example is the number of people who resign or change jobs and then take the money. Some do it deliberately. Some do it because they simply don't know of or understand the consequences. Some do it to get a deposit for a car, some do it to get money for home improvements. Some to go for a much-deserved holiday. Some actually save or invest the money elsewhere. Reasons vary.
My main gripe with retirement investments is that they only solve for retirement challenges and not for anything before that, not without being penalised anyway.
Retirement investments also tend to benefit higher income earners more than they do the lower income earners. But who really needs the benefits more?
A higher income earner(naturally) has a lower risk of becoming dependent on a state social grant. A lower income earner is the person you really want to encourage to contribute or save towards their retirement, but the current benefits structure does not address and encourage these individuals.
What's the solution?
As mentioned earlier, the measure of a good retirement plan is its replacement ratio. The solution is to start saving and investing towards this ratio outside of a retirement investment vehicle, i.e. use your tax free and discretionary investment vehicles to work towards achieving the required replacement ratio.
Plan for the worst, hope for the best. - Lee Chill
If you have a workplace pension fund, keep your contribution to either the minimum required or match your employer's contributions, if they offer this benefit.
Next, invest as much as you possibly can in your discretionary and tax free investment accounts
As you grow your portfolio, you can annually measure how much interest, dividends and income your investments are generating, and calculate the total as a percentage of your annual income. This will be your income replacement ratio. You can build it up as you go along.
The real advantage is that you get to see and experience the benefits of investing while you are still alive and continuously contributing to your investments.
The main benefit of this approach over using retirement investment vehicles is that should you lose your job, you at least have something to sustain you until you find a other job or active income source.
Imagine a scenario where you were able to earn 20%, 30% or even 50% of your annual income from passive investments..... What a place to be!
If you happen to make it to retirement without ever needing to rely on passive investments, imagine how much more comfortable your retirement will be.
It may cost you some of the tax benefits you may have become accustomed to, but it will give you real tangible options and a bit more in the peace-of-mind stakes!
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