If you hope to retire, or are retiring…Retirement will cost you lots –
survey August 14, 2010 By Bruce Cameron
The Real cost of Retirement
The cost of retirement is far greater than most pensioners believed at retirement it would be. Only 40 percent of pensioners now believe they saved enough for retirement.
But the message is getting through to retirement fund members – 75 percent of active members now believe they need to start saving for retirement at age 20, although 19.4 percent are of the opinion that it can be left until age 30.
However, only half of active members say they are on track for a financially secure retirement.
These are two findings of the Sanlam Employee Benefits Benchmark annual retirement survey.
For the 2010 survey Sanlam |included extensive research on the attitudes and experience of both active retirement fund members |and pensioners.
The pensioners surveyed have a message for those people still saving for retirement: you must start checking whether you are saving enough money for retirement more than 20 years before you retire.
Even those pensioners who believe they saved enough are worried that their money may run out if they are in retirement for an extended period because of increased longevity.
About 30 percent of the surveyed pensioners, whose average age was 67, indicated that they are already |experiencing financial |difficulties and are being forced to cut back on non-essential items.
Almost 75 percent of the pensioners get a pension of less than R10 000 a month. Against this, the average amount active members who were surveyed earn now is R15 449 a month.
The survey confirms earlier research by Alexander Forbes, which showed that retirement fund members are going into retirement without having saved for long enough and are compounding the effects of their lack of savings by retiring too early. And most pensioners find they have not taken sufficient account of the costs of retirement, particularly medical expenses.
Of the 250 pensioners surveyed, the average period of contributing to a retirement fund (an occupational fund or a retirement annuity) was 26.6 years.
The average age of retirement was 59, with almost 60 percent having no choice about retiring early because of retrenchment or disability. Consequently, their pensions are lower than expected.
Most active members expect to have retired by the age of 61.
Other facts revealed by the pensioner survey include:
- The vast majority say if they could have done anything differently before retiring it would have been to plan better and save more;
- More than half the pensioners believe you have to save a capital amount for retirement in excess of 10 times your final annual income.
- In worst-case scenarios, 12.1 percent of the pensioners forced into early retirement say that early retirement had “huge financial implications” for them, with 16 percent depending on others for additional income, 3.4 percent having to sell their homes and 5.2 percent having to give up their medical scheme membership;
- Almost six percent of the pensioners live with relatives;
- Many pensioners go into retirement having to use lump sum payments from their retirement |savings or other savings to pay off debt, and almost six percent continue to pay off a home loan;
- About 35 percent of the pensioners had to cut back on spending because of the economic recession;
- About 54 percent of the pensioners have other investments apart from their pensions;
- Of the surveyed pensioners, 16.4 percent changed jobs at some stage, and of these 44 percent cashed in their retirement savings, leaving them worse off in retirement;
- More than 40 percent of the pensioners received pre-retirement advice from employers;
- Of those who received financial advice before retiring, 71 percent received advice based on a financial analysis, with the vast majority then understanding their needs in retirement;
- Most pensioners spent lump-sum payments received at retirement within 30 months; and
- There are 27 percent of pensioners who still manage to save money every month.Risk cover vs savings
There is a slow increase in the number of retirement funds offering flexible death and disability benefit life assurance options.This is despite the fact that the combined retirement savings and death benefits of most young retirement fund members will not be adequate to meet the financial requirements of their dependants without the member taking out additional individual risk policies.
The Sanlam survey has found that the level of death benefits has slowly increased, from 3.2 times your annual pensionable salary in 2006 to 3.6 times this year.
The majority of retirement fund members (67.1 percent) say risk benefits are equally as important to them as retirement savings.
Of those funds that allow you to decide how much life assurance you require (reducing the amount that goes to retirement savings), the compulsory average minimum benefit is down to 2.3 times annual salary from 2.5 times last year.
Members who do have this choice have chosen a level of 3.7 times annual salary on average – down from 4.7 times last year.
The average cover for a lump-sum disability benefit is down to 2.6 times annual salary from 2.7 times last year.
The number of funds with capped premiums for death benefits, reducing the benefit, has dropped from 45 percent in 2008 to 33 percent this year.
Funeral assurance is now offered by 62 percent of funds, up from 50 percent in 2006.
You might be paying for choice, even if you’re not using it
You are probably paying more in investment costs than you need to because of the investment choices occupational retirement funds offer.
The Sanlam survey has found that 55 percent of funds now offer members investment choice – up from 45 percent in 2006.
But 65 percent of members do not make active decisions themselves. They rely on a default choice offered by most funds or the choice is made on their behalf by retirement fund trustees.
Only 25 percent of members of large retirement funds – those with 5 000 members or more – take advantage of investment choice.
But 88 percent of funds that offer investment choice charge all members a flat fee for the right to choose. So members not exercising their choice are subsidising those who do.
About nine percent of funds surveyed limit investment choice to certain categories of members, who are considered better equipped to deal with the choice.
The majority of funds that offer choice normally have a range of four or five options, and only 6.4 percent of surveyed funds offer more than 10 options. Only one fund offered a complete fruit salad of almost unlimited choice through a linked investment product services platform.
The number of funds offering a sharia-compliant portfolio has increased from 17.3 percent last year to 23.6 percent this year.
The number of funds which deliberately invest money in socially responsible investments (SRI) has increased from 16.5 percent in 2008 to 17.5 percent. An average of 9.3 percent of the total assets of these retirement funds are earmarked for SRI.
The survey also reveals there is a trend to allow retirement fund members to switch investment options more often. This year, 34.5 percent of funds allow daily switching, which is more than double the figure of two years ago, while 22.7 percent of funds allow monthly switching. A once-a-year restriction is down to 28.2 percent of funds – from 31.9 percent in 2006.
The top investment choice for members is in what are called lifestage portfolios. These are portfolios that gradually decrease the proportion of assets held in equities to reduce volatility risk (the risk that markets could crash shortly before your retirement).
The next most popular choice (47 percent) is smoothed bonus portfolios, which guarantee all or part of your capital and smooth returns over good and bad years.
According to the survey, the lifestage portfolios are becoming more sophisticated. A few years ago these portfolios moved everyone into the same asset class mix at the end stage. The survey has established that 43 percent of lifestage funds now offer multiple end-stage profiles, with the profile being aligned to the type of annuity you will purchase.
For example, if you intend to purchase a guaranteed annuity (pension) – where a life assurance company takes the risk of paying you a pension for life – the end stage of your lifestage portfolio will have a lower amount invested in riskier equities than the end stage if you intend to purchase an investment-linked living annuity (illa),
With an illa you choose the underlying investments and take the risk that you will have a sustainable pension for the rest of your life.
Currently, 59 percent of people reaching retirement prefer illas.
Most lifestage portfolios (39 percent) are 100 percent in cash by the time your retire, and a further 30 percent have a conservative 30 percent of assets in equities.
- The Sanlam survey comprises four separate studies, which this year involved getting the opinions of 200 retirement fund principal officers, 100 participating employers of umbrella retirement funds, 750 active fund members and 250 pensioners. It involved 200 stand-alone retirement funds and all nine major umbrella funds offered by the financial services industry.
- The survey is conducted annually and focusses on retirement issues.