The (not so bright) future of retirement

By: Schroder Investment Management

The (not so bright) future of retirement for South Africans calls for more savings

The Schroders Global Investor Study 2017 – a survey conducted by global asset management firm, Schroders, of over 22,000 wealth investors* in 30 countries – has found that non-retired investors in South Africa feel they should be saving 17.8% of their income each year, to live comfortably in retirement – a lot more than they currently do (12.2%), and significantly higher than global investors feel they should be saving (13.7%), on average.

Lesley-Anne Morgan, Global Head of Defined Contribution and Retirement at Schroders, says that this demonstrates the high degree of uncertainty that is currently being felt by many South Africans regarding the economic future of the country and the impact that this may have on their retirement savings.

“The significant difference of 5.6% between what South African investors think they should save and what they currently save – which was the third highest out of all countries, after Hong Kong (5.7%) and Chile (8.2%) – can be linked directly to the unstable economic environment currently being experienced in South Africa and how this erodes investor confidence.”

South Africans are understandably concerned that rising inflation and further currency depreciation could result in their retirement savings diminishing in real terms, Morgan explains. “The unstable political and economic environment in South Africa has resulted in consistently high levels of inflation, as well as currency depreciation – both of which negatively impact the value of retirement savings over time.

“Looking at IMF estimates for 2017-2022, for example, South Africa’s inflation is forecast to average 5.6%, compared to far lower estimates for developed countries like Germany and USA, forecast to average 2.1% and 2.4% respectively,” she explains.

Morgan adds that another factor driving the need for higher retirement savings among South Africans is the reality that state benefits in the country are considerably low. “There is a far lower dependency on state pension among South Africans (5%) when compared to that of the global average (19%). Instead, South Africans tend to depend on private investment vehicles such as company pensions (24%), personal pensions (17%) or other savings and investments (22%), to save for their retirement.”

Despite being aware of this, Morgan says that non-retired South Africans still appear overly optimistic, when compared to those who have already retired. “The study revealed that just over half (55%) of the non-retired investors feel their retirement income will be sufficient for a comfortable retirement. Retired investors, on the other hand, were less likely to feel their retirement income actually provides them with a comfortable life (35%) and subsequently the majority (85%) of them wished they’d saved more, including half (50%) who wish they’d saved a lot more.”

While these figures do not paint a very pretty picture for the future of retirement in South Africa, Morgan says that it is never too late for investors to begin making improvements to ensure a more comfortable retirement.
“Saving for retirement is challenging, particularly for investors who face a higher risk of inflation and unstable returns. South Africans should look at saving at least 16 – 20% when it comes to retirement and need to remember that most people in retirement will need a combination of growth assets – to counteract the impact of inflation – and guaranteed income – which proves valuable where state benefits are low,” she concludes.