A little reality in a sea of illusion about retirement funding

As was the case last year, just 6% of respondents in 10X Investments’ new Retirement Reality Report felt comfortable with their retirement prospects, yet most seem to think their savings shortfalls will follow the novel coronavirus and, in the words on Donald Trump, “disappear … like a miracle”.

In the Retirement Reality Report 2020 (RRR20), 40% of respondents younger than 35 expect to retire before age 60, ignoring that retiring early not only cuts into their saving years, but also adds to the years those savings must last. Only 9% of respondents over 50 still expect to retire before the age of 60. In fact, 36% of over-50s now expect to retire only after the age of 70, or not at all. 

This, too, seems unrealistic because retirement is not just a matter of choice, but also circumstance. The ratio of people pushing into the workforce (15-25) versus those eying retirement (55-64) has dropped from 3,9 in 1990 to 2,4 in 2020, but is still high compared to developed nations, which typically have a ratio of around 1 or less. 

This imbalance underlines how difficult it will be for older people to defend their jobs, or not retire at all. Looking at retired people for the first time this year, the report found that many (37%) were forced to retire earlier than intended.

Presently, only some 3,2m South Africans (5,4% of the population) are older than 65. But a growing number and percentage are now in the second half of their working life, up from 12,1 % (4,4m) in 1990 to 16,9% (10m) in 2020, a potential tsunami of people nearing retirement with inadequate pensions. This is the looming retirement crisis that threatens to burden our state finances even more. 

Economic hardship

Unsurprisingly, the poor prospective outcomes outlined in the report are partly down to economic hardship: it is simply impossible to save without a minimum level of income. More than half the respondents in the survey indicated severe financial stress. 

It is not only an income issue though: people in the low, medium and high-income brackets are equally worried about making ends meet in retirement. Rather, it is a savings problem that is rooted in the widespread lack of engagement around retirement planning. 

The idea that everything will turn out alright in the end also manifests in people’s attitude towards corporate retirement funds. Most respondents admit they have a poor understanding of the scheme they belong to, with 11% readily admitting they are simply not interested. 

This helps to explain why more than 60% of respondents cash in their corporate fund on leaving their employer. And why, for almost 30% of respondents, saving for retirement is just not a priority at this stage, as though they can make it up later. 

Realistically, they cannot. A savings plan that delivers a 60% income replacement ratio after 40 years would replace only 30% of final income after 25 years. One would have to save twice as much – requiring a large, and improbable, cut-back to an accustomed lifestyle – to make up the shortfall. 

High retirement fees compound the problem for those who do save by confiscating a disproportionate share of the saver’s pension, yet half the respondents are unaware of the fees they pay.   

Within any financial plan, market returns must play their part. From a South African perspective, the last 10 years have delivered gross returns of inflation plus 5% pa (proxied by the 10X High Equity fund), which is adequate if you are invested in a low-fee savings vehicle. 

Those returns were front-end loaded though. Over the last 5 years, they have barely exceeded inflation, which is relatively modest compared to returns elsewhere, especially the US. But this says very little about future returns. There have also been periods where US markets have delivered a negative return in rand over many years, for example between 2000 and 2009. 

All of this underlines the importance of engaging with your retirement savings plan and following a sensible investment strategy, rather than chasing past returns. With any plan, the aim is to control what you can. In the context of a retirement plan, that is the savings rate, fee levels, asset allocation and personal emotions. Optimising these factors would have protected investors against a potentially much worse outcome over the past five years.

Download a copy of the full report here

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