The topic of retirement age remains an extremely relevant one, with more and more corporate boardrooms including it on their monthly or quarterly Exco agendas. The reason is clear: everybody wants to retire earlier – but doing so can have a serious impact on your financial wellbeing later in life.

In South Africa, there is no legally prescribed national retirement age; it is typically defined in employment contracts or fund rules, and not by legislation. During the early 2000s, there was a move to reduce corporate retirement ages, in part to support the Broad-based Black Economic Empowerment (BBBEE) requirements of the time (which still prevail). But the downside of an earlier company retirement age is less time to save for retirement, which in turn reduces the drawdown (pension) that the employee will ultimately access from their retirement savings.

The flip-side of an older retirement age is, of course, retaining experienced team members for longer (and giving employees more time to save for their retirement). This should be balanced with the opportunities of employment for the youth – but, in short, corporate South Africa is asking the question: “Should we change our company retirement age?”

The six levers of designing better retirement outcomes

Old Mutual’s Blessing Utete and Keri-Lee Edmond wrote an informative article on this, which lifted out the six key levers for ensuring a better retirement outcome. These are:

1. The type and price of the pension an employee buys at retirement
2. How much of the employee’s salary is “pensionable salary”
3. Preservation rates
4. Percentage of contribution
5. Investment strategy (and the associated investment costs)
6. Normal retirement age

For the purposes of this article, we will focus specifically on lever 6. At the risk of over-simplification, let’s ignore the nuances of gender – which of course is very relevant, given that women do live longer than men. Applying the principle of averages, the following starting assumptions should deliver most South Africans a comfortable retirement outcome:

• Aim to make 100% of a member’s salary pensionable.
• Aim for them to save at least 15% of their pensionable salary towards retirement for all their working years (assumed to start from age 25 – and this is after the deduction of any contributions to risk benefits and expenses).
• Aim for them to save for retirement for at least 40 years – so the initial assumptions being made here are that South Africans will save from age 25 to 65.
• Ensure that their underlying investment fund has an aggressive investment mandate that should aim to deliver a net investment return over time of inflation + 5.35%.
  

Using assumptions for inflation and salary inflation of 5%, and applying the averages for gender, the above position should deliver an actual replacement ratio of 72%.

Can we afford to retire earlier?

Keeping the above assumptions constant, it goes without saying that the trend in the 2000s (of companies reducing their retirement ages) would reduce the replacement ratio. The following table indicates the impact of these reduced retirement ages on the expected replacement ratio (all else staying constant, with the line in bold indicating the base set of assumptions above):

The “how much is enough” question clearly becomes very relevant here, if employees are considering an earlier retirement age. For every year lower that they hope to retire, it is one year less of having their (already quite substantial) retirement savings pot otherwise growing by even more – and one year more of having to provide an income for themselves post-retirement (from a younger age, which also means that buying a guaranteed life annuity will give them a lower starting income). While these are intuitive statements, the impact on their replacement ratio is clear.

Clearly, simply working for two extra years makes a huge impact on the ultimate retirement pension that employees will be able to access as a percentage of their salary at retirement. Understanding this impact, and considering all of the information above, will help ensure that South Africans are saving enough to be fully prepared for retirement – whenever that may be.