The fifth edition of 10X Investments Retirement Reality Report (RRR22) shows that retirement readiness in SA is deteriorating by various measures for most South Africans, many of them unaware of, or unable to implement the small and often painless changes that could stave off a personal financial crisis in old age.
RRR22 is based on the Brand Atlas survey, which tracks the lifestyles of 15,4 million economically active South Africans (16 years or older, living in households with a monthly income of more than R6,000 pm, with access to the internet).
The report shows that the cost-of-living squeeze coming on top of stagnating incomes is real, making it ever-harder to maintain current lifestyles. 60% of those respondents who are saving for retirement say they are struggling financially. This is the case across all income brackets.
Many simply cannot afford to save because there is just no money left at the end of month. Their numbers are growing: 70% of respondents without a retirement savings plan say they are not saving because they just cannot make ends meet (up from 64% last year, and 56% the year before).
Even for those who do have some sort of a retirement savings plan, the focus is on immediate circumstances, even though most of those are largely beyond their control. Too many South Africans remain unaware that a few rather painless modifications to factors that are within their control would deliver huge returns down the line.
RRR22’s lesson is this: the situation is bad, but it is not hopeless. Small changes to an individual’s savings strategy would have a huge impact, more so if the effect is compounded by a few smart investment choices, and even more so if the compounding period was extended.
The most obvious tweak is to save more, even just a little bit. That is not to be glib about the financial pressures that most South Africans are experiencing, but saving 12% of income versus, say, 10%, would make a significant difference. Making a change like this might seem inconsequential, but it means saving 20% more, and hence 20% more income in retirement, with a loss in take-home pay of just 2%.
This modification would be even more impactful if the effect was magnified, for example by achieving a higher long-term return on an investment. The two key drivers of this are the asset mix and fees.
Although future returns aren’t guaranteed, a portfolio that holds a high proportion of growth assets like equity has historically delivered superior long-term returns to holding excess savings in a bank account. Yet, according to RRR22, of the people who do save, 45% hold their savings as cash. Only 20% invest for growth and the rest prefer a ‘happy’ medium.
It is understandable that people with limited means want to preserve their savings, more so if they are earmarked for emergencies. However, for those with a longer-term objective, such as securing a retirement income, holding money in a savings account, where the interest earned is often lower than the inflation rate, destroys rather than builds wealth.
Another key factor is fees, yet more than 50% of respondents saving towards retirement don’t know what fee they are paying, or believe there is no fee. Another 30% are paying more than 2% pa. Paying 1% pa less in fees also stands to build a 25% bigger nest egg.
The other important factor in the compounding equation is time. As it is, many respondents, especially younger ones, have a warped sense of how long it takes to accumulate an adequate retirement pot.
Perceptions have barely changed in this regard: almost half think they can do it in less than 30 years, versus the recommended 40 years, unaware that those extra 10 years could almost double their savings. In similar vein, one-third of respondents under 35 believe that retiring below age 60 is doable, but only 12% of over 50s agree; 59% expect to retire only beyond age 64, or not at all. Reality bites, but often too late.
Investment time is precious. Starting young makes an enormous difference because even small amounts of money left invested over decades will grow into amounts possibly not even dreamt of. Even tagging on a few years by delaying retirement from, say, age 62 to 65, has a big impact. It’s a triple boon: more money is invested, compound returns run for longer, and the savings must fund fewer years.
On their own, each of these adjustments – starting young, increasing the savings rate even modestly, investing in a high equity portfolio and keeping fees down – can improve the outcome significantly. Together, they could transform a modest pension into an exceptional one without any real lifestyle sacrifice.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250).
