Working out how much an average South African needs to retire comfortably is theoretically a simple process: actuaries calculate a figure taking into account the Consumer Price Index (CPI), expected rises in inflation and the cost of living, and the percentage of the salaries that people would need to save in order to offset those costs and live comfortably.
Financial advisers typically say one needs to ensure that they have saved an amount that can provide for at least 70 percent of their regular, or last, income before retiring. But as we’ve probably all experienced when it comes to money, it is rarely simple. Compounding the challenge is that South Africa has one of the lowest savings rates among emerging economies; and citizens generally have a poor understanding of retirement investments and their benefits.
Speaking at the Allan Gray Investment Summit in Johannesburg, Winston Monale, managing executive for Wealth Management, Global Investment and Solutions at Barclays Africa Group, extolled the virtues of starting earlier to save for retirement, considering that a typical retirement fund member has about 40 years to create adequate levels of savings before retiring. However, he warned that it is critical to take a qualitative rather than a purely quantitative approach to retirement planning.
“The qualitative approach involves individuals understanding their financial health and taking responsibility for their financial and future planning by partnering with a qualified and professional financial adviser. A good financial adviser will be able to assist in structuring investments more efficiently in order to get the best value out of that money. This includes diversifying the investment portfolio to ensure that the returns will be adequate for future needs; falling under this ambit is offshore trusts and investments, which have the power to overcome potentially depressed returns from investing in an unpredictable South African market,” Monale said.
“These offshore investments additionally are often structured in such a way that they offer considerable tax benefits. Depending on the investment vehicle selected, of course, investors are able to reap benefits on dividends tax and capital gains, among others.”
However, while it may be recommended that investors and their financial advisors look to source offshore investments where possible to build a stronger portfolio, this is not always a viable option -it depends very much on the individual’s specific needs, objectives and financial ability to invest.
With research showing that South Africa lags behind in terms of savings - with a savings rate of only 14 percent – and recognition that an extremely low percentage of South Africans are equipped to retire comfortably, there is a clear and dire need to find ways for the country’s people to start saving and investing to protect their futures, said Monale.
“It is no exaggeration that it is never too soon to start saving. Neither is it an overstatement to state the significance of increasing contributions when individuals’ salaries go up - the amount dedicated to monthly contributions should effectively go up commensurately,” he said.
“Building this culture of saving is going to require behavioural change through consistent and continuous consumer education. This is in the face of the Melbourne Mercer Global Pension Index, which found for example that projected pension at age of retirement sits at well below 20 percent in South Africa due to members taking their benefits in cash when they change jobs rather than re-investing the money. The index also found that only 1.3 percent of the country’s working population are members of a retirement fund,” he added.
Making it difficult for South Africans to save enough, said Monale, are some of the challenges currently facing the country’s economy: unemployment, declining disposable incomes and growing debt levels, particularly in the middle market.
These tough conditions are expected to continue for the foreseeable future - which will continue to make savings a tightrope for South Africans to navigate. However, Monale said it is important for South Africans to begin a culture of saving to be more financially prepared for their futures.