The current state of the global economy following the 2008 sub-prime credit crisis is likely to have a long-term affect on everyone, and more particularly on their retirement savings.
Last week we quoted Sandy McGregor, the equity and fixed-interest manager at Allan Gray, as saying investment markets are going to be a lot less exuberant than they have been for many years. One of the important reasons is that individuals around the world, many of whom were badly burned by high debt, have significantly changed their ways, reducing debt and increasing savings.
This in turn means they are spending less, companies are producing less and are making lower profits, which means lower returns for people saving money. This is further compounded by the low-interest-rate regime being used by many countries in an attempt to stimulate their economies.
We also quoted Alexander Forbes research based on historical data and various assumptions that shows historically that about 32 cents of each rand of your pension will typically come from what you (and your employer) contribute to your retirement savings, 38 cents will come from investment returns before retirement, and the balance of 30 cents from investment returns after retirement.
So if investment markets are going to provide lower returns, this means that all of us are going to need to revise our savings plans.
I have always thought it better to use a conservative real return of about three percent annual growth on retirement savings rather than what markets have provided historically as a planning tool. I suspect that three percent over the next 10 years may be a bit more realistic than the 7.3 percent real average annual return that the JSE provided between 1905 and 2005.
If the money is not going to come from market returns, there is only one other place most people can get money for their retirement, and that is from their own pockets. In other words, you will have to save more of what you earn.
But declining market returns are not the only problem facing an increasing number of people. As companies seek to maintain profits, so they will look to cut costs, and one of the biggest savings is in labour costs. Evidence is in Standard Bank's announcement last week that it is to lay off 2 000 employees.
Retrenchment targets
Companies that undertake retrenchment programmes often target those closest to retirement.
Many who have been laid off or who will be laid off in the future are people over the age of 55, and many of these will be forced into early retirement. Most will not have saved enough and most will be unable to find new employment, meaning they will have to live longer in retirement with less money.
This means that you either have to save a lot more early on - probably more than 15 percent of your income from day one of your working life - or you need a back-up plan in case you are retrenched.
In reality, it is unlikely that most people will be able to save more, so you need a back-up plan, but it must take into consideration two things:
- How not to draw on your accumulated retirement savings.
A mistake many people make when they are retrenched before retirement age is to take their retirement savings and plough them into a business such as a restaurant, foolishly believing that, because they like cooking, they can successfully manage a restaurant. When these ventures go belly-up, the consequence is a financially bleak old age.
- Avoiding high-risk, get-rich-quick schemes.
Once again, you risk losing your savings. It is important to remember that the first principle of investing is to preserve your savings, not to attempt to achieve stellar performance.
Many people prey on your fear of not having enough money for retirement. They range from out-and-out scam artists to those who sell legal but high-risk investments.
For example, with the current rand strength, an increasing number of companies are advertising currency trading investments on television, as if this is a simple and easy way to make vast returns.
It is not. Currency trading is very close to gambling and you place your savings at high risk. Currency markets are among the hardest to predict. No one predicted that the rand would hit R20 to the British pound in 2002, and no one imagined that the rand would climb back to its current strength.
You need to consider very carefully what you will risk in spending or investing your retirement savings to generate a new income and what you must do to bolster your retirement savings for the longer term. It is not going to be easy, and you must take great care.
But the most important guideline is to save as much as you can as soon as you can and then preserve the money until retirement.
Employers need to be more flexible in structuring your salary package
The answer for extra retirement savings may come from how you are permitted to structure your pay packet.
The recently published Sanlam Benchmark retirement survey reveals that 60 percent of employers base your total pay package on what is called "cost to company", but only 22 percent of the 60 percent allow you to decide how much money you would like to take in actual pay and how much you want to go to your retirement savings on a salary-sacrifice basis.
You are limited to claiming as a deduction against your taxable income a maximum of 7.5 percent of your pensionable income in contributions to an occupational retirement fund. You may also claim up to 15 percent of your non-pensionable income in contributions to a retirement annuity (RA) policy. (Non-pensionable income is all allowances, bonuses and other earnings that are not taken into account for retirement fund contributions.)
Your employer can claim as a deduction against its taxable income up to 20 percent of your total pay package as contributions made on your behalf to an occupational retirement fund.
This allows an employer to let you choose to forgo salary for higher retirement savings contributions. It is quite shocking that more employers do not allow you to decide how much of your total package should go to your retirement savings.
According to the survey, the average employer contribution for a stand-alone fund is 9.8 percent and for an umbrella fund it is 8.9 percent.
The Sanlam survey found that only 33 percent of occupational funds allow you to adjust, either up or down, your own retirement fund contributions, while 64 percent of funds allow you to bring your contribution level up to the 7.5 percent maximum.
While it is good that funds enforce a minimum contribution level, all funds should permit their members to make the maximum contribution, and employers should allow members to sacrifice more of their salary so that employers can make additional contributions on their behalf.
In other words, the maximum you can save without tax consequences for yourself or your employer is:
- Your contributions: a maximum of 7.5 percent of your annual pensionable salary.
- Employer contributions: a maximum of 20 percent of your pensionable salary for all benefits (including retirement savings, group life assurance and medical scheme contribution subsidies)
The costs of most occupational retirement funds are normally lower than retail retirement saving products, particularly life assurance RAs, so it makes sense for you to channel most of your retirement savings into an occupational fund, because it is |likely you will have more money at retirement.