South Africans continue to fail dismally to provide for their retirement, with the latest industry statistics on savings rates showing that on average members have eight times too little savings at retirement.
A big contributor to this dismal outcome is members’ failure to preserve their savings when they change jobs, are fired or retrenched. Alexander Forbes found the biggest reason members are withdrawing their savings is because they believe the amounts are too low to warrant the trouble of preserving them. The retirement administrator found that 61% of members who failed to preserve drew out amounts below R25,000.17% — the minimum amount you need to contribute over a 40-year period to achieve a pension of at least 75% of your final salary.
Many members fail to understand that smaller amounts saved earlier in your working life can make a huge difference later in life thanks to compounding growth, which is key to ensuring you have enough, Lange notes. Alexander Forbes says you and your employer should be contributing 17% of your earnings for 40 years to ensure you have a pension equal to 75% of your final salary.
Another key to achieving a good pension is earning an inflation-beating return, but these have been difficult to find lately. The average annual returns of the managers in the Large Manager Watch over seven years to the end of April shows that more managed to beat inflation, but still only one out of 22 beat inflation plus 5%.
Simelane looked back over the past 95 years to 1925 using a typical static allocation to the different asset classes required to achieve inflation plus 5%-7% and the returns of indices for each asset class. She found there were many periods where the returns were nowhere near even these inflation-plus targets.
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