While retirement seems far away, South Africa’s largest asset manager, Ninety One, has warned that a minuscule number of South Africans are prepared for retirement.
Widely cited research from the National Treasury and 10X Investments shows that around 6% of South Africans retire with enough income to maintain their standard of living.
New data from Old Mutual Corporate shows that the new two-pot reform, which places limits on withdrawals until retirement, could have increased this figure from 6% to 20%.
Either way, Ninety One said that the majority of investors retire without the financial security that they had hoped for, often needing to adjust their lifestyle, delay retirement or rely on loved ones.
“For many South Africans, retirement saving either starts late, happens inconsistently, or falls short of what is ultimately needed,” it said.
“Even if you are contributing to a retirement fund, saving alone does not automatically translate into a comfortable retirement.”
It said that most investors aim to replace about 75% of their pre-retirement income, but reaching this level usually requires consistent saving over time.
Beginning early and contributing consistently can improve outcomes. However, lower contribution rates or delayed start-ups can make it much harder to reach your retirement goals.
Many retirees will need their savings to last 30 years or more, which makes planning incredibly important.
What to do
Ninety One said that a practical way to think about retirement planning is to think about two numbers:
- 5% – A prudent starting annual income drawdown in retirement.
- 20x – The approximate multiple of your salary you may need saved to support that income if you want to retire on 100% of your final salary. This can be 15 if you target 75% of your salary.
Time is another crucial driver of retirement outcomes: the earlier you start, the more time your savings have to compound and the less you may need to contribute each month.
Starting later often means that you need to save more later in life to reach the same goal. If you aim to reach 20 times your final salary by age 60, you need to save 15% of your salary in your 20s.
However, this rises to 30% if you start in your 30s and 60% if you start in your 40s. “Starting later often means saving significantly more to reach the same goal,” it said.
There is hope for those who haven’t started yet, with Ninety One saying that it is never too late to act.
Small increases today can have a large impact over time, especially when paired with a strong long-term plan.
For those already saving, the asset manager said that it is a good idea to gradually increase your contributions.
“If you haven’t started yet, beginning with an affordable amount and building over time can be a powerful first step.”
Tax-efficient products, like retirement annuities and tax-free savings accounts, can also help grow savings more efficiently by reducing the impact of tax over time.
Long-term investing also benefits from compounding, with returns beginning to generate returns of their own. The longer one remains invested, the more powerful this effect can be.
Although the two-pot system allows one to access a portion of their retirement savings, Ninety One warned that frequent withdrawals can limit compounding.
| When you start | % of salary needed for retirement |
|---|---|
| Age 20 | ~15% |
| Age 30 | ~30% |
| Age 40 | ~60% |
