The transition for South Africans into their retirement life is not as easy as their younger selves anticipated it to be. Instead of easing comfortably into retirement where financial freedom has been achieved and they’re enjoying the fruits of their labour, the average retired person faces a very different reality.

The income they have at hand to fund their retirement is sadly just not enough. Hence the infamous statistic, published by National Treasury and supported by Old Mutual Corporate’s OnTrack™ Research, that only 6% of South Africans can retire comfortably.

South Africans tend to define retirement more emotively. Their definition of retirement is driven by lifestyle rather than by financials. This gives retirement funds something to think about in terms of how they can engage their members more meaningfully, with the end goal of shifting behaviour.

The typical South African employed person’s expectation for retirement is just that: an expectation that remains unmet. The stark reality is that many are not able to make ends meet during retirement, have not accurately depicted monthly costs – including medical costs, groceries, having dependents to still take care of – let alone having any money left over for travel plans or to pass on to their children. For most, the ambition of starting their own business to help fund retirement have also not been realised.

Why are the majority of South Africans unable to retire comfortably? One reason is that many start saving too late by cashing out, repeatedly, when changing jobs to help with their monthly expenses and to help pay off debt. Unfortunately, this leads to a worsened retirement outcome for them. The onus, then, is on the retirement industry to help Fund members plan better financially.

Old Mutual Corporate’s 2023 Retirement Reality Research reveals the many impediments that contribute to the gap between retirement expectation and retirement reality. These include higher than anticipated living expenses during retirement, improper financial planning, low rates of preservation during employment years, poor financial literacy levels, the number of financial dependents in a retired household, and debt that has not been paid off.

Recent retirees typically find their expenses much higher than anticipated. Unforeseen expenses include education, financial dependents, funeral costs and incorrectly estimating the cost of categories like groceries, utilities and short-term insurance This speaks to the need for proper financial planning for retirement.

Starting with the number of financial dependents in a retired household, Old Mutual Corporate’s research found that half of those who have recently retired are supporting at least one or two dependents, while one in three that have recently retired are supporting three to five dependents not planned for.

While most working South Africans claim to have a plan in place for retirement, when recent retirees look back, they realise it wasn’t an actual plan – it was merely saving for retirement through their employer.

Due to the inability to cope financially during retirement, and a desire to stay mentally active, almost two in three working South Africans claim that they will work past their normal retirement age. But this raises urgent questions. For example, what does it mean for youth unemployment? And what does it mean for formally retired individuals from a health and wellness perspective?

South Africa’s macro-economic environment is one where inflation continues to grow at a higher rate than salaries. This places increased strain (financially and emotionally) on South African households. Personal loans are on the rise, according to the 2023 Old Mutual Savings and Investment Monitor, at levels higher than previous years.

Many working South Africans are so financially constrained that they take on new debt to service old debt They aspire to resolve their debt before retirement, but one in three still take debt with them into retirement. Moreover, South Africans are dipping into their savings, and borrowing from friends and family, to make ends meet.

In an ideal world, employed people should be able to pay off their debt, so that in retirement their money can help provide a form of income. But many are taking out their one-third in cash at retirement and using most of those funds to pay off their debt. It should be reinvested into something that’s going to create sustainable growth.

Youthful Optimism

For Old Mutual Corporate’s 2023 Retirement Reality research, interviews were conducted with both recent retirees and employed South Africans across all age groups (including Youth – working individuals under the age of 30). The disparity between the two groups was striking.

The optimism of South African youth is reflected through their confidence in anticipating themselves having enough money during their future retirement, and their optimistic view of retiring young. Yet almost half of the youth surveyed reported to not know their retirement fund value. Ironically, two in three survey respondents claimed to have a financial plan in place for retirement.

When youth were asked what information would be helpful to assist with them achieving a better retirement outcome, the most popular view was ‘help me maximise growth on my investment (77%)’, versus limited to no reference to ‘help me understand tax implications’, ‘what my fund value is and will be when I retire’, and the ‘long-term implications of non-preservation’.

South African youth have much lower levels of debt compared to those who are older. An opportunity exists with the youth to inculcate good financial principles and proper planning, where preservation is encouraged to see improved outcomes for our future generations.

Closing the gap

Nabeela Noorani (Research & CVP Manager at Old Mutual Corporate), Samantha Jagdessi (Head of Consulting Strategy and Best Practice at Old Mutual Corporate Consultants) and Kim-Lee Wentzel- Ricketts (Head of Customer Research & CVP at Old Mutual Corporate) share their recommendations for mitigating the shock of retirement, and bringing the reality closer to the expectations.
• PROMOTE FINANCIAL LITERACY AND EDUCATION EARLIER

Feelings of inadequacy play with the psyche – especially among the youth. Linked to this are social pressures. South Africans are highly stressed (financially, emotionally, mentally), which can lead to rash and emotional decisions. An early understanding of debt principles – of the actual amount of money being borrowed, the duration needed, the terms and of compound interest – will equip members with adequate knowledge before a stressful occurrence.

• TAP INTO THE OPTIMISM OF YOUTH WHILE REPOSITIONING RETIREMENT PLANNING

South African youth are optimistic but lack a detailed picture of what retirement is. Many view it as a future concept that they needn’t give much thought to in the present. It is important to communicate with youth on their preferred platforms, using their trusted sources to connect with them, and repositioning retirement planning as something that will help them achieve their future desired goals.

• ENCOURAGE OPEN COMMUNICATION WITH SOLUTIONS IN PLACE

A member-for-life approach allows retirement funds to look at each member holistically on their pre- and post-retirement journey, and then offer tailored solutions at each life stage. Member engagement spans communication, advice, counselling and education.

• PROVIDE DEBT RELIEF AND COUNSELLING

High debt levels limit retirement savings. Financial advisors (in instances where people can afford to pay for advice) can help members build awareness, rebalance their debt levels and free up cash flow towards retirement. Where affordability is an issue, members should be offered free debt-remedying services to help them better manage and cope.

• PROMOTE AUTO-ENROLMENT

National Treasury’s proposal for auto-enrolment in retirement funds will improve retirement outcomes, as will the Two-Pot Retirement System (with its mandatory preservation). An aspect of auto-enrolment that needs consideration is the idea of ‘prescribed minimum benefits’ for retirement – as we find in the world of medical aid. If every income-earning South African was compelled to put some of their income towards retirement, with a portion of that preserved and inaccessible until retirement, it would go some distance in closing the gap between expectations and the reality experienced.

* This article originally appeared in the Old Mutual Mindspace Thought Leaders Forum special issue. Read the full publication here.