EXPECT to hear and read a lot about the “retirement crisis” in the years ahead. All over the western world companies, governments and individuals are struggling with the financial implications of the looming retirement crisis.
In the UK politicians have started talking about raising the official retirement age from 65 to 67 – to a massive uproar – while multinational giants such as Boeing, IBM and Ford, to name just a few, have announced plans to close their existing defined benefit funds within the next couple of years.
Western motor companies are finding it hard to compete against cheap motor cars from the East and one of the reasons is the very large pension’s liability of these companies built into the price of every new car that they make.
Ford, for instance, has a pension fund liability of about $1 800 added onto the price of almost every car they build.
In Japan and India, the pension problem is not as severe and therefore these countries tend to produce cheaper motor cars.
In the richest country of the word, the United States, the media is full of talk about the pension bomb ticking as the millions of “baby boomers”, that generation of Americans born between 1945 and 1954, head towards retirement in their millions with under funded pension fund liabilities.
Here in the SA the problem is equally big – if not bigger.
The state pension, currently R730 per month, is essentially a social safety net for the very poor. It can never be seen as the type of pension that anyone would like to look forward to.
Therefore, there is likely to be only two sources of future pension funding for most South Africans – their company sponsored funds or the individuals themselves.
And herein lies the rub. The average South African, although reasonably well educated and employed on a good salary, has no idea how his or her pension fund works. It is only when they start approaching retirement that the make an effort to find out what the pension benefits are likely to be – and then it is often too late.
Ask yourself – do you know the rules of your fund and what it means for YOUR retirement? If not, then I suggest that you start finding out.
It has been estimated that only about 4% of South Africans – and that is a very liberal calculation – can afford to really retire in the conventional sense of the word, i.e. stop working and live off a pension for their rest of their days.
For the rest it is going to be a case of working longer, working part-time for extra money, living off relatives/family/children. And even those who happen to be marginally financially independent might consider working for longer to ensure that their capital is not threatened by retirement.
I often come across people who want to retire at 55, or at the first opportunity that their company allows. This is very foolish as most people under-estimate the value of a regular income. My advice is to hang on that income for as long as possible, especially if you are getting closer to retirement and have not yet put enough money away.
Every year that you delay cashing in on your pension (and start drawing on your capital) means more growth in the portfolio and more contributions into the fund.
So think very carefully if you are tempted to react emotionally to an outburst from your boss, threatening to resign from your position.
How much money do you need?
Actuaries have worked out a very basic formula to help you reach retirement targets.
- To retire at age 55 you will need to have saved 12 times your average annual income.
- To retire at 60 you will need to have saved 11 times your average annual income.
- To retire at 65 you will need to have saved 10 times your annual salary.
How do you reach these targets?
To get to this target it has been calculated that you should save 15% of your salary for 30 years or 10% of your salary for 40 years.
If you are not saving at least 15% of your salary via a pension or private savings plan, your retirement is under threat.