How much you need to save to retire comfortably in South Africa

Around half of South Africans do not have a retirement plan, while as few as 6% are able to retire comfortably.

Janine Horn, a financial adviser from Momentum, said that burying one’s head in the sand and hoping for the best is not a solid retirement funding strategy.

A report from Genesis Analytics in partnership with the Financial Sector Conduct Authority (FSCA) showed that 90% of South African retirees cannot maintain their standard of living prior to retirement, and two-thirds of members have less than R50,000 in their retirement fund .

The FSCA noted that despite the average value of benefits being paid out increasing since 2017, the average contribution to pension funds has remained relatively stable at around R900 per month in real terms.

When comparing pension fund coverage, 92% of workers in the public sector have a retirement product, whereas roughly only 50% of workers in the private sector have a retirement product, said the FSCA.

The most recent 10X South African Retirement Reality Report shows that 38% of the 15 million economically active South Africans (households with a monthly salary of more than R8,000) strongly agree that they will need to keep earning money after retirement. A further 36% agreed in part to that statement.

“The proportion of people who expect to keep earning in retirement is particularly worrying considering South Africa’s alarming unemployment figures,” said 10X Investments.

The report details that a large portion of South Africans (25%) expect the same standard of living after retirement, while 79% of respondents worry about having enough to live on after they retire, and 74% expect to need some additional income, the financial services firm said.

75% replacement ratio

To retire comfortably depends on personal circumstances however a 75% replacement ratio is considered a reasonable target for members in general, said Vickie Lange, head of Alexforbes Research.

on average, members should contribute 17% of their salary over 40 years (from age 25 to 65) towards their retirement savings to achieve a 75% replacement ratio, she said.

“A 75% ratio means that for every R1,000 earned before retirement, you are targeting to replace R750 as an income during your retirement. Personal circumstances will influence the target replacement ratio for each person. Therefore 75% is used as an approximation for members on average,” stressed Lange.

According to the Alexander Forbes Member Insights 2021 report, which explored the retirement saving habits of income-earning South Africans, the average person can replace just 31% of their income with retirement savings, meaning that after working for many years, the majority will have to live on less than a third of their pre-retirement income.

When deciding at what age to start saving for retirement, Lange noted that the later in life you start to save, the higher the contribution rate will need to be to achieve the goal of 75%.

For example, with reference to the graph below, if you start saving 17% from age 40, you might achieve a 38% replacement ratio. This means only replacing R380 as an income during retirement for every R1,000 earned before retirement.

15% minimum rule

Global investment management firm T.Rowe Price said that contributing as much as one can as early as possible will assist in reaching retirement savings goals.

The firm recommends that you aim to save at least 15% of your income annually. They further suggest that by the time you are:

  • 45 years old: should have saved up to three times your salary.
  • 55 years old:7 times your salary saved.
  • 65 years old: saved as much as 11 times your preretirement salary

“Reaching this goal will require a savings rate of around 15% over the course of your working career,” said Judith Ward, certified financial planner at T. Rowe Price.

4% rule

“Traditionally, financial advisers, savers and retirees have relied on the 4% rule when working out how much to save for retirement and what kind of annual income retirement savings would provide,” said Discovery.

This method determines the lump sum investors need to provide an adequate annual income when they retire. If retirees are to withdraw 4% of their savings annually (adjusting for inflation every year thereafter), their savings would last at least 30 years.

Discovery provides the following example: “Assume you are retiring today with a final salary of R480,000 a year and need a replacement ratio of 90% of your final salary. Ninety percent of R480,000 to R432,000. To ensure you do not use all of your retirement capital in 30 years, R432,000 should be 4% of your total savings. This means you would need R10.8 million saved to draw 4% or R432,000 annually.”

In South Africa, where rates and dividend yields are low but high enough to sustain the rule, the applicability of the 4% rule remains undecided as the financial climate could change, unlike in 1990, where it came to be in the US when interest rates were much higher than currently, said Discovery.

Tracy Jensen, the product architect at 10X Investments, said that although the 4% rule still applies to retirement investing, it needs to be applied uniquely in South Africa as more of a broad guideline to help people make decisions in a complex environment, rather than a hard set rule.

How to mitigate the effects of inflation

“Most retirement funds have investment strategies that aim to grow savings by more than inflation, for example, 4% – 5% real returns over long periods (30 – 40 years),” said Lange of Alexforbes Research.

Suppose investment growth manages to meet or exceed its objective. In that case, inflation is generally not a concern as the actual value of savings is being maintained, and a reasonable amount of growth is achieved over the long term, said Lange.

She stressed that the higher the inflation, the more challenging it is for investment growth to meet real returns, especially over short periods.

In addition, there is an inverse relationship between bond yields and the cost of a pension. The higher the bond yields, the lower the cost of purchasing an annuity from an insurer; this can be an advantage for someone retiring.

“Bond yields are affected by interest rates, as interest rate charges are typically used as a mechanism to manage inflation within target ranges,” said Lange.

Increasing retirement age

Alexander Forbes noted that deciding to retire at the age of 65 rather than 55 can almost double a member’s replacement ratio.

Based on their findings, retirees are only achieving a replacement ratio of 26.7%, this is significant as retiring four years earlier could mean a reduction of approximately 10% in one’s replacement income post-retirement.

“This is significant given the already low average replacement ratio. Many retirees with long service still achieve a low replacement ratio at retirement.”

The impact of retiring at various ages is illustrated below for a new member aged 25 years and contributing at 12.9% of salary:

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