Developing a culture of saving for retirement can boost SA’s economy
Too many people cash in savings early – or simply don’t think about their future financial requirements until it is too late
South Africans don’t have a culture of saving, with most citizens unable to afford the same standard of living they enjoy in retirement as they do during their working lives.
Compared to a country such as China, another emerging-market economy that saves almost 50% of its GDP, SA does not even manage to save 16% of its GDP, according to the World Bank.
This lack of a culture of saving not only affects individuals – particularly as they reach retirement age – but also the greater economy. As Andrew Davison, head of advice at Old Mutual Corporate Consultants explains, savings generate investment, which, in turn, generate economic growth. Healthy and growing economies, by implication, create employment opportunities.
Many South Africans can’t afford to save for their retirement, which places a significant burden on the state. In the current financial year, the country will spend about R70bn on the state Old Persons Grant, a means-tested grant that allocates R1,600 a month to each beneficiary. “Imagine a situation where even half this amount could be directed at infrastructure investment and the positive impact this could make on economic growth and job creation,” says Davison.
Those who work for a company with a mandatory company retirement fund have a slightly better chance of having saved sufficiently for retirement. Research conducted by Old Mutual Corporate Consultants among members within one year of retirement, found that only about 8.3% of pension fund members and 3.5% of provident fund members had sufficient savings in their company retirement fund to be able to generate a pension of about 70% of their salary.
Take responsibility for your own future
The problem, says Delores La Vita, an investment consultant at Old Mutual Corporate Consultants, is two-fold: contribution rates to retirement schemes are, in general, not high enough; and preservation levels are too low. “Many members in retirement funds cash out their shares in the fund when they resign from their jobs and don’t preserve or transfer the value to new funds. As a result, projected replacement ratios, in general, are not close to the levels that would enable members to maintain their standards of living post-retirement.”
Says Davison, “South Africans need to take responsibility for their future financial security by creating a mindset focused on saving for their own future needs and requirements. In addition to developing a culture of saving, the consequence of high levels of saving has very positive economic benefits for the country.”
Many members in retirement funds cash out their shares in the fund when they resign from their jobs and don’t preserve or transfer the value to new funds.Andrew Davison
He advises looking out for funds that take cognisance of environmental, social and governance factors in terms of their mandates to fund managers, and which place an onus on sustainability. In a similar vein, the fund’s portfolio should include some offshore diversification.
“SA is a small, emerging-market country with a similarly small economy in global terms. Investing locally makes sense because this is where most South Africans will retire and spend their pensions. However, investing offshore provides protection from the vagaries of fortune that can affect a small country such as SA, as well as against economic recession, and any events that threaten to pummel the currency and lead to high inflation.”
Saving or investing for retirement typically requires investors to be invested over longer periods. This means staying the course even in the event of market downturns, says Rodney Msimango, head of business development at Old Mutual Corporate Consultants. “Rather than knee-jerk reactions to short-term market volatility, it’s more important that investors consider their investment objective, the investment horizon, and the combination of asset classes required to deliver those outcomes.”
Msimango adds that Investment objectives are measured in a number of ways, the most common measure being a level of return above inflation. “Over long-term periods, growth asset classes, such as equities, generally outperform more defensive asset classes, such as bonds and cash; therefore, the higher the return objective, the higher the allocation to growth asset classes; and the longer the period that is required to deliver those returns.”
He advises reviewing returns and portfolio balances on a less frequent basis to allow positive returns to be realised and to reduce the potential for impulsive reactions. “The more focused and disciplined your investment strategy is the easier it will be to remove emotional reactions from investment decisions.”
Like most decisions made in life, the future costs of current decisions are very important when making investment-related decisions for retirement. Says Msimango: “No matter your age, don’t wait to make decisions about your future financial security. Get good advice from a suitable investment consultant and put a strategy in place. Don’t wait until it’s too late.”
This article was paid for by Old Mutual.