The rising cost of living is a significant factor behind South Africa’s low retirement savings rate, with many consumers unable to afford to put aside money for their golden years. 

Rising consumer inflation, fuel and food prices and interest rates have, in recent months, eroded the income of consumers — making it difficult for them to contribute money to retirement savings products. 

This is a view held by 10X Investments, a firm that offers low-cost investment products and regularly tracks the attitudes of consumers towards retirement savings. 

“We live in an environment of rising fuel prices and inflation. Almost nothing is left for people to save for retirement at the end of the month. The means of saving are not there,” said Khwezi Jackson, an employee benefits consultant at 10X Investments. 

Jackson was in a webinar discussion on Wednesday with Business Maverick editor Tim Cohen and Rosemary Hunter, a pensions, benefits and financial services attorney at Fasken, about retirement saving trends in South Africa as outlined in 10X’s fifth annual Retirement Reality Report. 

The report tracks the lifestyles of the 15.4 million economically active South Africans aged 16 or older, living in households with a monthly income of more than R6,000, and with access to the internet. 

The report found that 70% of South Africa’s economically active population is not saving because it cannot afford to do so. These people don’t have a retirement savings plan at all, leaving them vulnerable as they won’t be able to live comfortably in later life.

Without enough savings, a lot of people will find it difficult to retire and be forced to continue working to eke out an income. Or if they retire, they will find it difficult to maintain the same lifestyle they had during their working years. Others will either become a burden on the state or their children.

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10X Investments has found that only 8% of economically active people are executing a well thought out retirement plan and will be able to retire comfortably. This is a low percentage, which Jackson has described as a “retirement ticking bomb”.

Hunter agreed with Jackson, saying the rising cost of living gets in the way of people embarking on a retirement savings journey. 

“People also have a lot of debt to pay and that’s why they cannot save for retirement,” she said. Many financial advisors encourage people to first pay down their debt before starting to save for retirement. After all, high debt levels erode wealth or stunt any efforts to generate it. 

Jackson believes the rule of thumb is that you need at least 60% of your yearly salary to live comfortably in retirement. That might be enough if you’ve paid off debt – long-term debt (such as a mortgage) and short-term debt (such as personal loans), if your children don’t depend on you financially, if you are in excellent health and no longer contribute to a pension savings product (such as a pension or provident fund). Then you can kiss the office and working life goodbye.

Better education for savers and investors

Other concerning findings that emerged from the report is that some people who are contributing to pension saving products don’t know what they are saving or investing in. They don’t know the terms and conditions of the products they are invested in, and if they will have enough money set aside to retire comfortably. 

“About 39% of respondents wished to know more about what they are invested in and saving in,” said Jackson, who said this applied mostly to people who are part of workplace-related schemes in which employers deduct a portion of their pay for pension savings.

Hunter said employers or human resources managers must educate employees about what they are invested in and make sure that the investment products align with their retirement goals. 

“We do have a culture in the country of assuming that the employer knows what it is doing. But they don’t, because they are running entities and are not retirement experts. They need to educate employees about a retirement fund,” she said. 

An area in which savers need to be aware of is the fees they are charged by administrators or managers of retirement savings, and financial advisors.  

Underscoring this is that the report by 10X Investments indicates that more than 50% of respondents saving towards retirement don’t know what fees they are paying, or believe there is no fee charged. Another 30% are paying more than 2% in fees every year. The fees are levied on the total savings/investments accumulated by a saver. 

Fees are a contentious issue because pension savings, which are exposed to the JSE through company shares listed on the bourse, might yield low investment returns. But administrators or managers will still claim their fees despite the poor performance of pension savings or investments. 

Jackson said the general rule for fees is about 1% on index-tracking investment products, which are designed to offer investors exposure to an entire index on stock markets at a low cost and management effort. Fund managers don’t put much effort into managing index-tracking investment products because such products track the returns of a stock market index such as the JSE All Share Index. 

“If you are paying 1% on fees, you are probably paying a lot of money,” he said. 

The fees charged become higher if financial advisers are actively managing investment or retirement savings, including monitoring the performance of shares regularly. For their expertise and effort, financial advisers would typically charge fees of between 1.5% and 2%. DM/BM