South Africans are not making adequate financial provision for their retirement, with sufficient savings seen as being able to provide income equal to roughly 75% of your final salary.
This was the view held by all retirement specialists that finweek spoke to earlier this month. Saving for retirement can be a complex task for many South Africans, but, they say, with the right financial adviser it doesn’t have to be.
The good news: it’s never too late to start. But the sooner you begin, the easier it will be to secure a comfortable retirement.
“The older you start, the more risk you run of running into problems,” says Barrie van Zyl, a senior manager at Alexander Forbes.
“We hear it from clients all the time: ‘I should have saved more’.”
The person who starts early will let the market contribute more to their retirement through compound interest, while the late starter will have to find more of that money themselves and less from the compound interest, one expert explained.
The suggested industry savings level is to save 15% of your gross income (before tax and other deductions) over 40 years – from the age of 25 to 65 – but only a few South Africans are meeting this target.
How much should you save?
“South Africans are not saving enough,” says Ascor Independent Wealth Managers’ Wouter Fourie, an award-winning certified financial planner. “Only where you have employers taking off monthly deductions are South Africans meeting that 15%.”
Where the average person should be aiming to save R15 of every pre-tax R100 to retire after a 40-year career, a late start or early retirement would require a much higher savings rate.
If a person wants to retire well before the age of 65, or start saving later than 25, then they will need to up that saving rate closer to R33 out of every pre-tax R100, says Warren Ingram, executive director at Galileo Capital.
Another rule of thumb is to save 15% of gross income if you start at age 25; if you start at age 30, you need to be looking to save 20% and starting at age 40, you are looking at 42% of gross income, says Van Zyl.
“Saving for retirement is not an exact science. The more you save, the more choice you will have at retirement,” says Wanita Isaacs, head of investor education at Allan Gray. “Instead of looking for an exact number, the spectrum for each age should be used as a target.”
Taking advantage of the tax benefits
Many South Africans are also failing to take full advantage of the compound impact of the tax benefits of saving for retirement through vehicles such as pension funds and retirement annuities, according to the retirement experts that finweek spoke to.
Individuals can contribute as much as 27.5% (capped at R350 000 a year) of gross remuneration or taxable income towards pension, provident or retirement annuity funds, explains Magnus de Wet, director at Vista Wealth Management.
“With these savings vehicles you can save pretax, and therefore get the benefit of compounded growth on a larger amount,” he says.
Isaacs calls the decision to take advantage of the tax breaks linked to retirement products a “no-brainer, especially when you see what it means in rand terms”, she says. “This means more money for you to use and less money given away to Sars.”
Ingram says the other major benefit is that all growth in the retirement annuity is completely tax-free.
Investors must also utilise their tax-free savings accounts (TFSA), which currently allows for tax-free savings of R33 000 a year, and a lifetime limit of R500 000, says De Wet. While these savings are made from after-tax earnings, the returns earned on a TFSA are tax-free.
Ultimately, the aim is to maintain quality of life in your last few years of work, and to provide for a comfortable retirement.
“Very few people can afford to retire at 60 or 65 these days,” says Sonia du Plessis, a financial planner at Brenthurst Wealth. “People are living longer, so they have to work longer. This is why it’s important to start early and get into a habit of saving.”
One expense that people underestimate in retirement is the cost of medical care. Ingram says the possibility of needing frail care later in life is something that consumers need to consider too.
“What if you need daily care, what if you need to be in a retirement home with frail care?” he says.
“It’s almost impossible to get in last-minute; these things need to be planned for in advance.”
Van Zyl says the average South African spends R28 000 a year on their medical aid costs; frail care, he says, costs R190 000 a year.
“People don’t even think about that,” he says, arguing that if they are not financially independent enough to afford this, the costs are borne by the next generation of the family.
Choosing a retirement annuity
The main retirement savings products available for South Africans are pension or provident funds, which are provided by employers; or retirement annuities, which individuals can invest in through financial services providers.
With retirement annuities, it is important to look at the costs, warns Du Plessis.
“Life-linked retirement annuities are expensive and the choices are not great.”
Galileo’s Ingram says: “You should pick a retirement annuity that has no obligation for monthly contributions and no penalties, such as when you want to move from company A to company B. The best ones are run on a pay-as-you-go basis, with no upfront fees.”
Isaacs explains that the more flexible retirement products are usually unit trust-based, which allows you to decide when and how much you want to contribute.
“In addition, look out for layers of fees,” she says. “Only pay for financial advice that you actually choose to have and receive, and find out what all the fees are that will be deducted from your investment.
Make sure you know what these are for and that you are getting value for money.”
It is important to check what the underlying unit trust or investment options are, and decide whether there is an option that suits you that has delivered good returns over time, Isaacs says. “Read the investment objective and check the long-term return history to see whether it has delivered on its promises.”
Building a diversified retirement portfolio
What a diversified retirement portfolio will look like depends on the individual and their assets, and what is meant by “portfolio”, says Isaacs.
“For some a diversified portfolio might include their investments, their home, their business,” she says. “But in terms of retirement investments specifically, generally a balanced unit trust, such as those offered by most investment managers, is a good option for a long-term investment.”
A balanced unit trust offers a good savings option for retirement as well as post-retirement, according to Isaacs.
“Thirty years is still a long time to be invested [post-retirement], and retirees need enough growth on their investment to ensure their income is sustainable.
A balanced unit trust includes adequate equity exposure for long-term growth and more stable asset classes so that the investment risk is managed.”
The tax breaks the government offers on retirement funds (as described above), make them an obvious choice in terms of generating better returns over time and lowering the income tax on an individual’s current income, says Isaacs.
However, retirement products have restrictions. While many see this as an advantage – your money is not easily accessible, for example, and therefore is safeguarded for retirement – some people may want more flexibility, Isaacs says.
This could be either through wanting access to their money, or having an increased exposure to equities or offshore assets.
“A tax-free investment is the next best, and is a good additional investment as it offers tax benefits without the restrictions of a retirement annuity,” she adds.
“It does have its own restrictions though, specifically the maximum contribution amounts,” says Isaacs.
“Diversification is extremely important,” says Ingram, who recommends a split of 75% local exposure and 25% overseas investments. He suggests a portfolio consisting of 65% in equities, 10% in high-growth assets and 25% in bonds and cash.
Another option is investing in private non-listed companies, while some younger South Africans see Bitcoin and crypto-currencies as part of their investment mix, Ingram says.
Van Zyl says Alexander Forbes’ house view is to have no more than 30% to 35% in offshore exposure, although admittedly some clients do go higher than this.
Craig Gradidge, founder and executive director of Gradidge-Mahura Investments, says that investors will need to look outside retirement products if they want greater offshore exposure, but this requires discretionary capital.
He recommends a minimum 30% to 35% exposure offshore. (Retirement products are restricted to a maximum offshore exposure of 25% of assets under management.)
It is very important that your portfolio represents the risks that are in line with your age and risk profile, says Du Plessis. She believes it is also important that a retirement plan fits in with your other financial goals.
Listed property companies, for example, are often seen as a good long-term investment that will deliver inflation-beating returns over time, Du Plessis explains.
REVIEWING YOUR PORTFOLIO
Once you have picked a strategy and established a retirement portfolio, how often should you review it?
“At least once a year,” says Brenthurst Wealth’s Sonia du Plessis. “Your financial adviser should just check through everything and make sure it’s all on track.
We tend to just leave things that have to do with money. But it’s important to track if you are saving enough, and if not, make adjustments.”
Ascor’s Wouter Fourie agrees, saying this should happen at the same time as your tax planning: “You should look at your tax and retirement portfolio in January and make sure you are taking full advantage of the tax breaks every year.”
Isaacs says when you get your annual increases or bonuses, you should decide how much will go towards your retirement and how much will be used to fund your current lifestyle.
“Re-assessing this annually means you keep tabs on both your savings and your changing lifestyle needs, which your savings will eventually be funding,” she says.
It is also important to review your investment return, but to keep in mind that short-term fluctuations and years of low, or even negative returns, are part of the reality of long-term investing, says Isaacs.
“Check whether your investment’s medium to long-term return is in line with the investment objective to decide whether it’s still on track.”
Other retirement experts recommend more regular reviews. “The minimum is to review your portfolio annually, but ideally quarterly is best,” says Galileo Capital’s Warren Ingram.
Alexander Forbes’ Barrie van Zyl believes in two reviews a year. “You don’t want to make too many changes,” he says. “It’s best to select a strategy in the beginning and see it through.”
But he stresses that the reviews are there because sometimes the strategy needs to be adjusted.
“You need to make sure that the strategy is still in line with what you want to achieve.” However, he warns, “Don’t get involved in the emotions of the market”.
Fourie agrees. “If you understand your plan, you will trust it and stick to it.”
THE RETIREMENT LATE STARTER
Young people are often not interested in saving for retirement or building up assets, says Alexander Forbes’ Barrie van Zyl.
“They need to be more careful with their money. People need to be saving more, they need to be taught the importance of this from a young age,” he says.
Ascor Independent Wealth Managers’ Wouter Fourie says it’s never too late to start, but you need to make sure you are saving the maximum allowed and cutting back on unnecessary expenses.
“Pay down your debts as quickly as possible, and once they are paid off, start using the money [freed up in your budget] to invest,” he says. “People need to also look to bring in extra income, perhaps through learning new skills.”
Galileo Capital’s Warren Ingram says that an investor who has had a late start to saving for retirement should look to raise the portion of their before-tax income invested to 20%, or ideally to 33%.
“You might not be able to do it at first,” he says. “But as your income increases, as you get a raise, you can save more.”
Brenthurst Wealth’s Sonia du Plessis says it’s important not to procrastinate when it comes to retirement saving.
“Clean up your budget, look for cost savings, and get into the habit of saving.”
The other golden rule is not to cash out retirement savings when changing jobs, opting instead to transfer them to a preservation or new pension fund.
“Don't draw that money,” stresses Du Plessis. “Don’t be tempted to pay off your car, or your bond. Send it to a new fund.
I’M RETIRING. WHAT ANNUITY SHOULD I BUY?
Magnus de Wet, director at Vista Wealth Management, offers the following advice for readers nearing retirement:
There are two main types of annuity products that can provide you with an income when you retire.
The first is an insurance-type product called a guaranteed annuity (also called a traditional or life annuity).
The attraction of guaranteed annuities is the fact that it secures you with a predetermined income for the rest of your life.
You can also decide if your spouse can continue with it upon your death.
Another option is to receive the same income from day 1 or an income that increases with inflation.
The biggest negative with the guaranteed annuity is that your heirs won't be able to inherit whatever is left on the death of the lives insured.
Another negative is you cannot increase your income should your circumstances change.
The second is called a living annuity, which provides investors with a lot of flexibility.
For one, the investor can at any point change their service provider or convert their living annuity to a guaranteed annuity – this is not true for guaranteed annuities.
It also allows you to choose your own income each year (subject to regulatory limits). You have total freedom to change your underlying investments and asset allocation.
Any remaining capital upon death passes to your heirs.
The biggest negative about this product is the risk that you may outlive your money.
It is therefore extremely important that investors, in conjunction with their financial adviser, manage their income drawdowns in line with the performance of the underlying investments.
This is part of the cover story that originally appeared in the 16 November edition of finweek. Buy and download the magazine here.