The pension that many retirement fund members are ending up with is just a quarter of their earnings because they make the wrong decisions about their retirement savings, statistics in Alexander Forbes’s latest research show. 

On average members retire with 3.7 times their annual salaries – they should have another eight times more, the retirement fund administrator says in its latest Member Watch survey of more than a million retirement fund members. 

If you have around 12 times your annual salary saved up, it is likely to be enough to buy you a pension equal to 75% of your final salary. 

Instead many members have a quarter of this and it provides only a little over 26% of their final salaries as a pension when they buy an annuity. Retirement fund experts suggest that 75% of your final salary is a good target as long as you have paid off your debt and your children have left home by the time you retire.    

One big reason why many members fail to reach this target is that they withdraw their pension savings in the early years of their working life. 

The Member Watch survey shows that 61% of members who withdraw their savings when they resign or are dismissed from their jobs did so because the amounts they had saved in their funds were less than R25,000 and it seemed like too little money to bother with.

But in fact, these small amounts snowball into much bigger amounts the longer you keep them invested and drawing them out when you resign your job really hampers your chances of getting a good pension in retirement. 

You will earn more than you contribute over your working life in compounding growth if your investments have enough exposure to the equity market and target a return that is 5% to 7% above inflation – so at least 9% when inflation is 5%, Old Mutual investment consultant Thabisile Simelane said in a recent presentation to trustees and principal officers who belong to Batseta.

Earning more than inflation is key, Simelane says, or you may as well put your money under the mattress and expect to be very disappointed when you get to retirement. 

Most funds targeting inflation plus 5% to 7% have failed to achieve that target for the past seven years, but this is not unusual in the history of investing, she says. You should take comfort in the fact that funds have only met this target about half of the time in every seven-year period for the past 95 years, she says.

This is because the equity market has recently not delivered inflation-beating returns, but when it does, funds can return well in excess of inflation and the net result if you are invested is you will be able to save enough to support yourself when you no longer wish to work. 

But the key to saving enough is to save for long enough that you earn the inflation-beating returns and benefit from the compounding. 

Alexander Forbes’s Member Watch shows that if from age 25 you and your employer together save 17% of your salary in your retirement fund and you do not ever withdraw that money, by age 65 you could have enough savings to get a pension of up to 75% of your final salary. 

But if you withdraw your savings made after the first five years and start again at age 30 saving the same amount, your pension will only be just over 60% of your final salary. 

If you start saving again after withdrawing at age 35, your pension will reduce to less than 50% of your final salary.