South Africa has a population of approximately 60 million people. Approximately 10% are in the age bracket of 60 years and older, while almost 6% of this 10% bracket is older than 65 years.
Life expectancy has steadily increased from an age profile in the mid-40s during the 1950s decade, to an average of approximately 64 years currently. The fairer sex is still outliving their counterparts by an average of five years so when structuring a combined retirement strategy it is important to keep this factor in mind as well.
People are definitely living longer and because of this fact careful retirement planning needs to become a very urgent and focused topic for households. The scary fact is that less than 6% of retirees are currently able to maintain the lifestyles they were accustomed to prior to retirement. Recent events like the very poor market performance experienced in 2018, the Covid pandemic of 2020 and the recent and ongoing tensions in Ukraine, as well as the uncertainty surrounding China’s political aspirations, have further highlighted the fact that most retirement savings are simply not sufficient to not only supply basic income needs but are also not buffered against these external factors.
According to a recent Financial Sector Conduct Authority (FSCA) survey, approximately 92% of public sector employees do have some sort of retirement structure in place, but when the private sector was analysed then this number dropped to an astonishing 50% only. If one considers that South Africa’s retirees are set to double by 2050, then it is almost impossible to fathom why planning for this life phase is still being neglected.
There are still way too many people taking sole comfort from their employers’ goodwill and intentions in providing a retirement pool of sorts. Even here we are still noticing that members continue to contribute only the absolute bare minimum thus leaving their own retirement nest egg solely at the mercy of the scheme’s potential to continue to earn enough compounded growth over time. This is simply not prudent as the bulk of these schemes are managed in a very conservative fashion mainly to protect the capital and simply do not take into consideration every individual’s retirement goals or needs.
So how big does the eventual pool of retirement funds have to be? This is extremely subjective and is not a simple “one size fits all”. Lifestyle requirements are personal, but then there is also the question of how much buffer to be built in as well to protect against adverse market movements and even changes in income requirements that may be forced through illness and even family responsibilities. One only needs to revert to the 2020 pandemic where livelihoods and businesses were decimated and where young families were even forced to move back to their elderly parents in order to simply survive, to highlight the importance of proper retirement planning.
To try and quantify a number, some “rules” have been developed over time.
The first rule is rather popular and seems to be preferred by some larger corporate schemes and their advisors. The idea here is to have an honest look at an existing budget and to calculate approximately 75-80% of this number and that this will then be the target income your eventual retirement pool should sustain. If for example, you are currently spending R25 000 per month to maintain your lifestyle, then your eventual retirement pool should be able to offer you a regular income between R18 000 to R20 000 per month and hopefully, this will continue for the rest of your natural life.
The question that one might ask is why not 100%? The rationale behind this argument is that at retirement certain expenses that your current budget may include will hopefully by then have either reduced or fallen away. Transport costs may be reduced as you are not travelling to a place of work anymore, housing debt may have been settled and then there may also be a cost saving from not having to pay for any educational needs for children. A strong argument to rather keep the 100% existing budget is that in most cases retirees find that medical aid costs skyrocket and that it becomes one of the biggest drains on income eventually.
If we assume that an inflation rate of 6% is applied as the annuity rate, then a person with a current budget of R25 000 will require at least R4 million at retirement if the income is to cover only 80% of the existing budget. When the target is to keep the expected income budget the same, then the eventual retirement target amount now increases to R5 million.
Another approach is the 5% rule and in most cases an inflation rule. This merely assumes that stock markets have consistently been able to generate wealth exceeding inflation over time and if you then draw from your eventual retirement pool at these levels, the possibility of eroding your capital greatly reduces and your portfolio may just outlive you. Assuming our retiree has accumulated R4 million or R5 million then the monthly annuity amount should be set at no more than R16 700 and R20 833 respectively if we apply the 5% rule. If the stock market and thus the underlying investment strategies achieve more than these rates then there is the possibility of achieving some capital growth as well, which may leave room for future income increases, but without having to drastically increase the original set income percentage rate.
Another favourite rule is the 15x or 300x rule. In simple terms, this means that you take your gross annual earnings and multiply this by 15 and this should be the target of your eventual retirement pool. A tweak to this rule is to take your existing monthly budget and multiply it by 300. If we again assume a monthly income or budget of R25 000, which equates to R300 000 as gross annual earnings, then this means you will require at least R4.5 million at retirement. If we apply the 300x rule on a supposed monthly budget or income of R25 000 then this number jumps to a rather hefty target of R7.5 million. This may look rather absurd, but then there has never been a complaint that someone has too much in their retirement pool. It is also much easier to maintain the livelihood of a retirement portfolio if the annuity rate is reasonable so the bigger the pool you can draw from the lower the actual target rate may have to be. A bigger pool may also buffer your portfolio better against sudden and unexpected market corrections and when those little gremlins in life do visit, then again there may be some emergency reserves as well.
All these supposed rules or planning techniques have flaws and the biggest drawback is that investors are simply hoping and expecting that even after retirement has taken place and the pool is not being supplemented anymore, it will continue to deliver outcomes that are sufficient to maintain livelihoods and lifestyles. Most retirees are currently bleeding their retirement portfolios with hefty annuity rates to maintain their lifestyles or to cover their basic budget requirements as their final pools are simply not sufficient.
Retirement planning does not start when your employer has stated such and should be implemented from literally the very first source of income received and preferably as soon as possible in your lifetime.
Remember, it is not at what age you eventually retire but rather at what income level and not having any plan or strategy will guarantee failure.