Only 6% of South Africans can retire comfortably, according to the National Treasury. This situation is exacerbated by the fact that most South Africans find it extremely difficult to save the 15% of their income needed for a favourable retirement outcome. In addition, the current pension-fund system allows access to the entire amount invested when an employee changes jobs, and preserving their investment is completely voluntary. The combined result of the above is that many people cash in their savings when leaving an employer, which means they have less money when they retire.

The Two-Pot Retirement System aims to change that. Coming into effect on 1 March 2024, the new system could lead to a significant increase in the number of people who can afford to retire comfortably. This is because the new system will allocate future contributions to two different “pots”, a Savings Pot and a Retirement Pot. Based on the draft regulations, after the effective date, only limited withdrawals from the Savings Pot will be allowed, once a year and subject to certain conditions.

This change will guarantee the preservation of at least two-thirds of future retirement savings until the date of retirement, where the amount would have to be annuitised.

In the meantime, we must contend with and plan around our current reality. Deloitte’s South African Investment Management Outlook 2023 revealed that South Africa’s savings rate is below that of its emerging market peers and is one of the lowest in the world at only 0.5%. Some reasons for these low savings rates are high unemployment, the household debt burden and financial pressures to meet immediate needs.

This scenario, however, does not mean people don’t want to save for their future. Retirement planning is a personal journey, and a one-size-fits-all investment strategy may erode value and detract from one’s goal. Numerous economic variables increase the cost of living and adversely impact retirement outcomes, and some are beyond our control.

What impacts the value of retirement outcomes?

Inflation is one of the key variables that impacts retirement outcomes, particularly when there are sustained periods of high inflation. Though South Africa’s inflation is far from the highest in the world, the year-on-year inflation rate was reported as 6.3% by Stats SA in May 2023 (noting it has cooled over the months of June and July), which is outside the upper limit of the South African Reserve Bank’s target range of 3% to 6% and can therefore be considered a high inflationary environment.

Most South Africans, or employees, will have experienced this at the supermarket tills, where a can of baked beans that cost R9.99 in 2019 costs R16.99 today, and will cost over R23 in five years’ time at the May inflation rate.

This example demonstrates that if an investment is not growing or is growing at a rate lower than the general increase in the cost of goods and services, that investment is losing value year after year. It’s known as the erosion value, meaning the investment is worth less every year because fewer goods and services can be bought with the same amount of money.

While regularly contributing into a retirement investment vehicle is at the core of any retirement plan, ensuring that these retirement investments grow higher than inflation is also essential. It’s therefore best to keep an eye on the economic tides, speak to your financial adviser regularly and discuss revisiting your investment portfolio to keep your desired retirement outcomes and goals in mind. As they say, nothing is ever cast in stone.

Members of a company pension fund aren’t immune to inflationary risk either; fund managers may place contributions into low-risk assets to protect the member’s capital as much as possible. However, this comes at a cost, as the expected returns are lower, and the growth of the member’s fund interest is very nominal.

The good news for pension-fund members is that they are entitled to performance updates from the fund and its trustees. Getting this feedback is important, since it can assist in making decisions on alternative investment vehicles to supplement pension-fund returns and provide additional cover to buffer against the effects of inflation on the desired retirement outcomes.

Why growth assets are crucial

Every investor should try and maximise their contributions and returns to have an optimal outcome in retirement. They need to engage with a financial adviser to map out exactly what the retirement planning journey will look like.

After considering the contribution rate, the next retirement strategy is to have a good mix of asset classes to enable the best possible chance of preserving and growing the retirement fund sustainably. That would include a focus on equities, properties, and alternative assets, which are generally expected to outperform inflation over the long term.

Investors can also make use of different investment portfolios to mitigate inflationary risk and ensure their retirement savings are shielded from short-term volatility and long-term losses over time.

For example, Old Mutual makes it possible to have the best of both worlds through our Smoothed Bonus portfolios, which allow exposure to growth assets right up to the point of retirement, but with protection against short-term volatility and explicit guarantees, which means clients have risk mitigation built into their portfolio.

Retirement daunts many people, but this need not be the case. A few life changes can dispel anxiety and fears:

• Find a reputable financial adviser
• Map out your retirement goals and how much you will contribute to your retirement fund
• Consider investment options that align with your plan
• Start working from a budget
• Start saving and make the commitment for the long haul.

Being proactive in managing your investments will ensure they remain on track to achieve your desired retirement outcome.

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