Retirement annuity and inflation: Are you saving enough in today’s money?

• A retirement annuity can grow in value over time, but inflation may reduce the purchasing power of your savings.  

• Increasing contributions, maintaining suitable asset allocation and managing fees can help protect long-term retirement outcomes.  

• Regularly reviewing your RA and using 10X’s calculators can help you determine whether you’re saving enough for retirement.  

A retirement annuity is a long-term savings vehicle that helps South Africans save for retirement while benefiting from attractive tax advantages. Investors often focus on the growth of their RA without considering the impact of inflation. Inflation can reduce the purchasing power of your retirement savings: R2 million today will not have the same purchasing power in 20 or 30 years.   

This needs to be taken into account, as inflation gradually erodes the value of money and may affect the lifestyle you can afford in retirement. Factors such as fees, asset allocation, inflation-adjusted returns, contributions, and your retirement plan all play an important role in determining your retirement outcomes and whether your savings will be enough to support your lifestyle.   

In this article, we’ll look at the impact of inflation and how to determine whether you’re saving enough in today’s money. 

What is a retirement annuity?  

A retirement annuity (RA) is a long-term savings product designed to help you save for retirement. Qualifying retirement fund contributions are tax-deductible up to 27.5% of your taxable income or the annual cap of R430,000, subject to other applicable limits. This applies collectively to contributions made to pension, provident and RA funds. You can invest in your preferred underlying funds within the RA and switch between them as your needs change.   

You can contribute through a regular debit order or make ad hoc lump-sum contributions. It’s important to contribute to your RA consistently and with discipline, provided you have the means to do so. If you receive a bonus or salary increase, or perhaps you receive an injection of cash from elsewhere, you may wish to put some of it into your RA to boost its growth potential.   

From age 55, you can generally retire your RA and use the applicable portion of your savings to purchase a living or life annuity, which can provide income during retirement. Depending on the applicable retirement rules, you may also be able to take a portion as a cash lump sum.  

How does inflation affect your retirement annuity? 

Inflation affects the cost of goods and services over time, causing prices to rise. As a result, the same amount of money buys a smaller basket of goods and services than it did in previous years; your money doesn’t go as far, and your purchasing power declines. You can see the effects of inflation in everyday expenses such as groceries, rent and housing, insurance, fuel and medical costs.  

An RA is a long-term investment that may be invested for many decades, so inflation can have a significant impact on your RA capital over time. South Africa’s inflation rate changes over time, and even relatively low levels of inflation can have a significant cumulative effect over multiple decades, so it’s important to account for it when managing your RA and planning for retirement.  

For example, the amount of money you need to maintain your current lifestyle could be much higher by the time you retire, even if your spending habits stay the same. This means that your RA may grow in value over time without necessarily providing the purchasing power you need in retirement.  

When reviewing your RA, you should consider whether your investment growth and contributions are sufficient to keep pace with rising living costs. Failing to account for inflation could leave you with a retirement savings shortfall, even if your investment balance appears to have grown substantially.  

What does saving in today's money mean?

When saving for retirement, it’s important to consider both the nominal and real value of your RA investment. The nominal value reflects what the investment is worth today, while the real value accounts for inflation and its effect on your capital’s purchasing power.  

Purchasing power is the amount of goods and services you can buy with a specific sum of money. Inflation can erode purchasing power, so the same amount of money buys fewer goods and services over time. As you plan for retirement, be sure to consider the future purchasing power of your RA capital as well. 

Consider the following: if you have R1 million in retirement savings in 20 years, and inflation averages 5% annually, that amount would have the equivalent purchasing power of around R377,000 today. This shows why looking at your retirement savings balance alone may not give you an accurate picture of your financial position. It’s better to consider inflation-adjusted values, as you get a clearer understanding of whether your savings are going to be enough to cover your living expenses and support your desired lifestyle during retirement.  

Are you increasing your retirement annuity contributions to keep up with inflation?  

As mentioned previously, it’s important to make your RA contributions consistently and diligently. You also need to ensure they keep pace with inflation. For example, you might set up a debit order for R2,000 per month, but it’s vital to increase this over time to account for inflation. R2,000 per month today is worth far less than it was 15 or 20 years ago.  

You could increase your contributions after a salary increase, or each year in line with inflation. You might also make a lump-sum contribution as your savings grow or when you receive a bonus. As always, keep your contributions affordable and manageable so you can continue making them consistently. Even a small increase in your contributions can improve your retirement outcomes over the long term. 

It’s worth reviewing your contribution amount at least once a year to assess whether it still aligns with your income, financial circumstances and retirement goals. For example, if you currently contribute R2,000 per month and inflation averages 5% annually, you’d need to increase your contribution to R2,100 the following year to maintain its purchasing power. Continuing to make these adjustments over time can help prevent your regular contributions from gradually losing their real value. You can also use the 10X Retirement Annuity Calculator to explore how different contribution amounts may affect your long-term retirement savings.  

How asset allocation can help protect your retirement savings against inflation 

Asset allocation can help protect your retirement savings from inflation and influence their potential growth, as research by Brinson, Singer and Beebower indicates. Asset allocation refers to how a portfolio is divided among asset classes such as equities, real estate, bonds, cash and offshore investments. It also plays a key role in how an investment may respond to factors like inflation. The right mix for you depends on your risk tolerance, investment timeline, and long-term financial plans and goals. 

As an investor with 10X, you do not need to choose individual shares, bonds or properties themselves. Instead, investors may select from a range of diversified 10X investment funds. Each fund has a predetermined combination of asset classes and is designed for a specific type of investor, risk profile and investment horizon. You may choose the fund which most closely aligns with your financial goals, time horizon and investment risk.  

Equities are usually included in a portfolio to provide long-term capital growth and returns that beat inflation. They provide exposure to companies and economic growth, but this exposure may also come with volatility. There may be significant volatility over shorter periods. This may mean that equities are more suited to investors who are comfortable with risk in their portfolio. 

Real estate can help hedge against inflation while providing exposure to real assets and economic activity. It can also generate income through rentals and distributions and support long-term portfolio growth. However, listed property may be volatile and affected by factors such as interest rates, economic conditions, and occupancy levels. 

Bonds are generally less volatile than equities, but they do still have some risk. Bonds can offer stability, income and diversification in your portfolio. Values may be affected by factors like changes in interest rates, inflation expectations and the ability of the issuer to repay its debt. Bonds still may outperform expectations despite being seen as more conservative.  

Cash is the most liquid and stable of the asset classes. It is less volatile than equities or real estate. Cash may not keep up with inflation over long periods, which can erode purchasing power.  

Offshore assets can offer exposure to a wider range of industries, businesses, currencies and economies outside of South Africa. This may help improve diversification. This may also bring additional risks, such as currency fluctuations, geopolitical events, and changes in global markets. 

Retirement annuities are subject to Regulation 28 of the Pension Funds Act. This means there is a cap on how much of your portfolio may be allocated to equities and offshore holdings. Current regulations set this at 75% equity exposure and 45% offshore exposure.  

At 10X, our funds have been carefully selected for you to ensure they comply with Regulation 28 and are well-diversified across asset classes. To find out more about our fund options, please visit our funds page.  

How retirement annuity fees can affect inflation-adjusted returns 

RA fees may reduce the returns available to reinvest and compound over time. If this is combined with inflation, it may noticeably affect the growth of your RA over time. To read more about fees, our math article takes a closer look at its impact.  

Let’s look at an example to show how fees and inflation can affect the real value of your RA savings over time. We will assume the following information:  

• Starting capital: R0 
• Monthly contributions: R10,000 at the end of each month 
• Investment period: 30 years  
• Inflation: 5% per annum 
• Gross annual return: 10% 
• No withdrawals are made during the investment period, and contributions remain fixed  

Scenario 1 - 1% fees: After 30 years, your RA could grow to an estimated nominal value of R18.31 million. However, after accounting for inflation of 5% annually, this would have the equivalent purchasing power of around R4.24 million in today’s money.    

Scenario 2 - 3% fees: After 30 years, your RA could grow to an estimated nominal value of R12.20 million. After adjusting for inflation, this would have the equivalent purchasing power of around R2.82 million in today’s money.    

Just modest differences in fees can still lead to major differences in retirement outcomes. In this case, we see a difference of around R1.41 million in today’s money, highlighting the impact of fees. This example also shows why it’s important to consider inflation when reviewing your RA. Note that this example is for illustrative purposes only and real results may vary.   

Investors should also understand the following terms when reviewing fees:   

• TER (Total Expense Ratio): Ongoing expenses within an investment fund, calculated according to the applicable standard. 
• TIC (Total Investment Charge): The total investment charge, which combines the TER with transaction costs within the fund. 
• EAC (Effective Annual Cost): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges. 

The Effective Annual Cost (EAC) was introduced by ASISA in 2015. This gives investors a standardised way to compare costs of different products and providers more easily. The EAC combines the different charges linked to an investment into an annual percentage. This may include investment fees, administration costs, advice fees, penalties and more, depending on the product.  

Assuming all other factors are equal, a lower EAC generally means that a larger portion of your money is invested and available to potentially grow and compound. A higher EAC may mean there are fewer available returns to grow and compound over time. Costs shouldn’t be considered in isolation, as other factors like service, investment strategy and product features should also be considered. The usual fees that you may see charged on your RA are as follows:  

1. Administration fees: These are the fees related to admin tasks for the fund, such as compliance and reporting. 
2. Advisor fees: There will be fees associated with the advisory services if you are making use of an advisor. 
3. Management fees: These are the fees charged for the running and management of the fund. 

Our fees at 10X are kept low, transparent and simple, so that they are easy for all investors to understand. Explore our products to learn more.  

How to tell if your retirement savings are enough 

When it comes to retirement planning, one of the most important questions to ask yourself is whether your current savings will be enough to support your desired lifestyle during retirement. To determine this, you first need to estimate how much income you’ll need each month, using your existing living expenses as a starting point.   

You would then need to account for inflation and how your living expenses may increase between now and your anticipated retirement date. This can give you a clearer picture of how much retirement income you may need in the future to maintain a similar standard of living.   

The next step is to review your existing retirement savings, monthly contributions, investment timeline, expected investment returns and fees. Remember to include any other retirement savings products you may have, rather than focusing exclusively on your RA.   

You can use the 10X RA Calculator to explore different scenarios and estimate whether your savings are on track to meet your retirement goals. If you identify a potential shortfall, you may want to consider increasing your contributions, reviewing your strategy or adjusting your existing retirement plans. It’s important to review these projections regularly, as inflation, investment performance and your financial circumstances may change over time.  

How 10X can help you plan for inflation and retirement  

10X is focused on helping South Africans to build long-term savings for their retirement years. You can expect an index-tracking investment strategy with a more active approach to asset allocation. Our fund options are well-diversified across asset classes and Regulation 28-compliant. Fees are clear, simple and low-cost with no hidden surprises, so you can be sure of what you are paying.  

You can adjust your monthly and lump-sum contributions to suit your circumstances. You’ll also have access to several free online tools on our website to help with your planning. The EAC Calculator can help you compare and evaluate the costs of different service providers. As mentioned above, the RA Calculator lets you review your RA savings, contributions and age to see how you’re progressing toward your retirement goals.  

If you need assistance with any aspect of your RA and would like to talk through your available options, don’t hesitate to get in touch with the experienced and knowledgeable 10X investment consultants who are on call for no additional cost.  

Final thoughts on retirement annuities and inflation  

Inflation can affect your retirement savings over time by reducing your purchasing power. When planning, consider the real value of your RA savings. Focus on appropriate asset allocation, minimising fees where possible, and contributing consistently and with discipline to your RA. Regularly reviewing your RA can help you check whether you’re still on track to meet your RA goals. You can also use the 10X RA Calculator to compare scenarios and assess your savings. Get in touch with 10X Investments to learn more about our retirement annuity options.