Most retirees underestimate how long their retirement years will last. Picture: 123RF/DIEGO VITO CERVO
Most retirees underestimate how long their retirement years will last. Picture: 123RF/DIEGO VITO CERVO

South Africans have saved, on average, only R1.8m to buy a pension at retirement, but expect to receive R12,000 a month as a pension income, but the reality is that their capital is 22% short of the amount they need to achieve their goal at current annuity rates.

If these retirees want to invest their nest egg into a living annuity instead of a traditional annuity, they need retirement savings of R3.6m.

South Africans’ expectations of what their retirement income will be, based on current savings and returns, will not be realised, says Bjorn Ladewig, longevity actuary at specialist retirement income company, Just SA. “There is a major gap between expectation and reality.” 

On average, respondents in “Just Retirement Insights”, an independent survey commissioned by Just SA, expect a monthly income in retirement of almost R12,000. This implies an expected annual income rate of 8%, based on their average retirement savings of R1.8m.

When you are ill you contact your doctor; why hesitate to contact a financial expert if you have a money issue?
Bjorn Ladewig, Just SA

However, in current market conditions this expectation is not achievable — a guaranteed lifetime income that targets inflationary increases provides an annual annuity income rate of approximately 6.5% for a couple where the male is aged 65 and his spouse 61.

This means that, to achieve the expected level of income, retirees need to save at least 22% more to reach a retirement nest egg of R2.2m that can buy a guaranteed annuity.

But if you want to invest in a living annuity and earn a monthly income of R12,000, you will need at least R3.6m not to exceed the widely recommended drawdown rate of 4% a year. This is the maximum percentage of your capital recommended by the Financial Sector Conduct Authority (FSCA) as a drawdown rate for living annuities to provide a sustainable income rate for a couple aged 65 and 61 at retirement, Ladewig says.

The gap is a problem for all

The retirement funding gap between expectation and reality is evident for all income groups, as the following survey results show:  

These expectations are not realistic if compared to the 6.5% income rate achievable in current market conditions, as set out above, for a typical retiring couple. This “expectation gap” is even higher for higher-income groups.

Catch-22

According to the Money Advice Service, most retirees also underestimate how long their retirement years will last. Only planning for 20 years may mean running out of money — especially as men and women aged 65 in SA have a 50% chance of living beyond ages 83 and 87, respectively.

“Our later years may require more money because of end-of-life care,  something that is not always factored in when saving for retirement. People don’t consider that they will be living for longer,” Ladewig says. “If we do need care in our old age, we may need it for many more years than we think. Recently, the oldest man, Masazo Nonaka, died in Japan at the age of 113, according to TIME magazine.”

Talk to a financial adviser

Working out how much you need to save for retirement is not a priority when you are struggling to making ends meet, but realistic retirement planning is important if you want your retirement income to match what you expect it to be, Ladewig says.

It is imperative for those reaching retirement to get the right financial advice when investing their retirement savings, which are meant to last them for the rest of their lives.



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“Seek financial help earlier rather than later if you think you will need it,” says Ladewig. “When you are ill you contact your doctor; why hesitate to contact a financial expert if you have a money issue?”

Peter Chadborn, director of Plan Money, a UK financial advisory firm says, “People should put their expenditure requirements into two columns. One is the essential living costs that you want to secure with a fixed-income source. Only then can you approach column two, which lists your discretionary lifestyle costs: how often you want to eat out, how many cars you want to own and how often you want to go on holiday.”

Those facing a retirement income shortfall will have to consider working for longer, downsizing their homes and cutting down on expenses where possible.