Can you live on 20% of your salary?
Ask yourself if you can live on a pension that is 80% lower than your salary and if not, sit up and take an active interest in what is happening in your retirement fund.
Just because the company that you work for offers you a retirement fund and automatically deducts a percentage of your salary and puts it into a retirement fund, does not mean you are assured a comfortable pension to live off in your old age.
The latest research by Alexander Forbes shows that more than half of South African members end up with a pension that is about 20% of their final working salary, Michael Prinsloo, the managing executive of research and product development at Alexander Forbes, says.
Your occupational retirement fund trustees are probably aiming for you to have a pension of around 75% of your final salary, but this is only a target. Sadly, very few members are actually on track to achieve this target.
The percentage of your final salary you can expect as a pension is called your replacement ratio - it's the ratio of your income your pension will replace.
But the replacement ratio you achieve is dependent on many variables. These include:
How much you save;
Your salary increases (because your retirement fund contributions are calculated on your salary, which hopefully increases each year);
How long you save for;
Whether you preserve your retirement savings rather than spend them when you change jobs; and
The investment returns you earn on your savings.
What you can do
The earlier you start saving and the more you can contribute, the better your pension will be.
The challenge is your retirement may seem a long way off and you may have far more immediate financial concerns, Prinsloo says.
The main thing is to check what pension you are on track to receive and if it is less than what you had hoped for to take action as soon as you are able.
Since March 2016, you are allowed to contribute up to 27.5% of your taxable income or your remuneration to your pension or provident fund and claim it as a tax deduction - this means some of what you contribute will reduce the amount of tax that is deducted from your income.
According to Alexander Forbes's research, retirement fund members and their employers are contributing an average of 14% of their income into their funds and only about 12% is going towards retirement savings.
Of the 14%, members contribute on average 5% of their salary and employers put in 9% but about 2% is deducted to pay for life and disability benefits and fund administration costs.
Find out if your retirement fund allows you to make additional contributions, if so, you can ask the human resources department at your employer to deduct a bit more from your salary each month. Alternatively, consider paying a portion of your annual bonus into your retirement fund.
The survey found that the most common retirement age has increased from 60 to 65 over the past few years.
A later retirement age means you can save for longer, benefit from the power of compound interest in your saving and importantly, your savings will need to fund a pension for five years less in retirement, Prinsloo says.
Vickie Lange, head of institutional best practice at Alexander Forbes, says even if your employer has specified 65 as the age at which you must retire from your job, you can defer your retirement from your fund.
In other words, if you can continue doing some work, you can start drawing your pension from your savings in the fund at an older age.
What not to do
Never withdraw in cash and squander your retirement fund savings when you change jobs, even if the amount is not that large. Even a small amount preserved will build up.
A significant amount of savings is lost by retirement fund members because they do not preserve their savings, the survey found.
About 17% of members aged 25 to 30 leave their funds and just over 14% of fund members aged 30 to 35 change jobs and only 9% of exiting members bother to preserve pension savings that have accumulated to that point.
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