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We are seeing some indications that the ‘Great Resignation’ that rolled through the US and Europe in the wake of Covid has arrived on these shores, albeit to a lesser extent. But, warns Kelin Pottier, Product Development Specialist at 10X Investments, South Africans who are inspired to act in the interests of liberty in the short-term should give a thought to their long-term financial freedom too.

The Covid era brought many mindset changes, most notably working from anywhere but the office. This undoubtedly contributed to the record number of employees resigning over the latter part of the pandemic. Having grown accustomed to the increased autonomy, many now want to preserve that freedom.    

The exodus was first observed in the US. In what is now called the Great Resignation, almost 50 million Americans quit their jobs during 2021. A similar phenomenon has manifested in South Africa, according to the latest edition of Remchannel’s bi-annual salary and wage movements survey. The April 2022 edition reported rising average staff turnover, at 17,7% over the prior 12 months, with 36,4% of this resulting from resignations. This is the highest level of any termination category over the past 10 years.  

Per the survey, just 19% left for better pay and 8% to emigrate. The rest wanted to improve their work environment and career prospects, or find more balance in their life with less stress.

From a cost perspective, it is an ominous trend. For employers, the issue is the expense and inconvenience of filling vacancies. For employees, a big issue is the likelihood that they will cash in their retirement fund and stop saving.

Even though the default regulations now enable existing employees to become paid-up members of their corporate-sponsored retirement fund until they make a different choice, cashing out remains the go-to option for most South Africans.

The most recent 10X Retirement Reality Report found that nearly 60% of people who left a corporate scheme did not preserve their savings. Other surveys put the number closer to 80%. Things may improve with compulsory benefit counselling; Sanlam’s Benchmark 2022 research offers some hope in that regard, with 42% of surveyed consumers indicating that they would not cash out. Still, that leaves almost 60% who would. 

Such tendencies are the main reason why most corporate fund members still can’t look forward to a comfortable retirement. Financial education has failed in this regard, which is why National Treasury has now proposed the two-pot system: ostensibly to provide retirement savers emergency access to a portion of their savings, but really to compel preservation of the rest until retirement. 

Download 10X Investments’ free e-book on what to do with your retirement savings when changing jobs

Younger employees are especially prone to raiding their fund, in the erroneous belief that a small balance is immaterial. It is not. In the context of a diligent 40-year savings plan, the first two years of saving will fund around 10% of a retirement, the first 13 years, about half. By contrast, the last 10 years can be expected to add only 15% to the pot. 

Nor is it feasible to play catch up. Tools such as the 10X Retirement Calculator can assist individuals calculate how much they need to save for retirement to not be left in the lurch when the time comes. Instead of saving at the recommended rate (15% of income over 40 years), cashing out after 10 years would require them to save 25% for the remainder of time to come out even. Those who start over in their 40s would need to save half their income. 

This disproportionate impact is due to compounding, or rather the lack of it. Members who cash out early don’t lose only what they’ve saved, but also the return they would have earned on those savings. After 40 years, compound returns typically constitute two-thirds of their retirement pot. That is a lot of money that they don’t have to work for.

If the local resignation trend seems counter-intuitive in a market with record high unemployment rates, it comes with the proviso that it is more prevalent in sectors where skills are scarce. Such workers have always enjoyed greater job mobility. What appears different today is that it is less about money and advancement, and more about lifestyle and flexibility. 

People are migrating away from salaried jobs to work for themselves, often consulting their previous employers. While participating in this so-called ‘gig economy’ promises more flexibility, it portends an irregular income and less job security. It also lacks the disciplines and benefits of formal employment, such as retirement saving.

In the corporate world, contributions are automatically deducted and invested every month. Most money flows into the Trustees’ default portfolio, which is specifically designed with the member’s best interests in mind.

In the gig economy, the onus falls on the individual to replicate this. An RA, a retirement fund for individuals, confers the same tax benefits as a pension or provident fund, but is more restrictive, usually more expensive, and requires initiative to set up. 

Gig workers may put this on the back burner, losing valuable savings and compounding time. Also, it now falls on the individual to make optimal investment decisions, in terms of asset mix, investment style and fees, the key factors driving the long-term outcome. That’s a lot to get right.

Freedom, as they say, doesn’t come free. There is always a cost to more flexibility, whether it be airline tickets, investment products, or work arrangements. It may feel empowering to receive pay unencumbered by deductions for risk cover, medical insurance, retirement contributions, and perhaps even tax. But ignoring these obligations means living at risk and being more vulnerable to life’s twists and turns.

Workers in the gig economy do have the advantage that they won’t be forced to retire at a set age, but their skills may still become redundant and they, too, will encounter ageism. They are thus not excused from pursuing financial independence. At the very least, that means preserving their retirement fund when they transition, and continuing to save and invest sensibly thereafter. Otherwise, their ‘great resignation’ could lead to a not-so-great retirement.

For more information on working towards a great retirement, visit www.10x.co.za  DM/BM

Author: Kelin Pottier, Product Development Specialist at 10X Investments

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)


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