Retirement reality check: Are you prepared for 20 extra years?

Gary Mockler
Group Chief Executive Officer

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Do you know you may live 20 years longer than your parents did?

Most South African companies have a retirement age of 65.  If you work for a bank or similar financial institution, there’s every chance that retirement age is 60.  On average, South African retirement funds have a gross contribution (from both the company and the employee) of some 16% according to the annual Sanlam survey.  Remembering that costs and insurance are deducted from this gross amount, the net percentage of payroll allocated to retirement funding is just over 14%.

While retirement funds, stipulated retirement ages, and retirement contributions have not substantially changed over the past 40 years, longevity statistics show that if you’re now 40, you could have a real expectation of living 20 years longer than your parents did.  According to Sanlam, based on their aggregated data of 300 000 umbrella fund members, to arrive at the same retirement fund capital at the end of one’s working career – based on the same retirement fund contribution as previously noted – a further 15 years of contributions is required to compensate for the increased longevity statistics.

It makes sense that if you need money for a further 15 to 20 years, you can’t depend on the same actuarial assumptions used by retirement fund
rule-makers 40 years ago.  The (still) prevailing assumption for financial planning models is that 20 years of retirement needs to be planned for.  This assumption may be fundamentally wrong.  If an investor lives for an additional 15 or 20 years, then it is 35 to 40 years that needs to be provided for.  Something must change.

GTC is not seeing any trend of companies extending normal retirement age.  In fact, perhaps the opposite is true Just like the banks, some companies are disinclined to have employees over the age of 60.  Instead of 20 years of retirement income planning, individual investors have no choice but to take the full responsibility of finding retirement capital for the additional 15 or 20 years that a 40-year-old can look forward to.  Compounding what could be a significant retirement shortfall is Government’s recent Two-pot regulation allowing retirement fund members to access retirement monies whilst they are still working.

Recognising that the investment principles of time, the amount invested, and compounding growth have not changed since investments themselves – and importantly will not change – there are only a few alternatives.  Start earlier.  Invest more.  Spend less.  Work longer.  Aim for (and hope for…) higher returns.  These are the only obvious alternatives in planning for a longer retirement.  We can’t change the realities of these fundamental investment principles, the only additional action that can change matters is the behavioural side of investing.

Employers are unlikely to extend retirement ages, notwithstanding the irrefutable proof that people are living longer.  AI and computer automation compound this complex problem.   Consequently, one can’t rely on extended employment (with the fortunate few continuing past retirement age on a contract basis) or finding another job.

Actions that 40-year-olds (and of course all investors) should seriously consider include:

Making additional voluntary contributions (AVC’s) beyond that prescribed by an employer up to the maximum tax deductions prescribed by regulation.  Allocating AVC’s may be boring, but it works.  And it’s the most tax-efficient investment possible for an employee.

Spending less is the next most obvious investment strategy.  A common trend experienced by GTC wealth managers when taking clients through TrueNorth – our automated, actuarily driven financial planning process – is that families often have unplanned for and unnecessary costs.   That boat storage on the Vaal, the numerous streaming entertainment channels, unnecessary short-term insurance (including perhaps that same unused boat sitting in storage?), and the spontaneous daily cappuccinos and MrD lazy meals, are common TrueNorth findings.  A reality check understanding that the casino always wins should temper an investor’s enthusiasm with their online betting activities.  A disciplined audit of the family monthly budget will provide for a meaningful additional recurring contribution to long-term savings (which could perhaps be allocated to that same AVC or Tax Free Savings?).

Constructing a passive income stream is possible though requires some discipline and long-term outlook.  Buying a second property for the specific purpose of renting it out will incur some initial pain as the bond amount exceeds the initial rental.  Once the annual rentals have increased (whilst the bond amount remains relatively static) the pain goes away and the passive revenue starts.  And it doesn’t stop.  Of course, once the bond is paid up, gross revenues almost equal net revenues, excluding tax.

Airbnb has catapulted this principle into another dimension.  Short-term rentals far exceed that which is possible on conventional long-term leases.  This requires the project to be a fairly substantial ‘side hustle’ with daily management of the property and people management skills.  Cape Town is an obvious choice, being one of the most densely populated Airbnb destinations in the world.  Some interesting stats from Airbnb note that the average occupancy rate of their listed Cape Town properties is 260 days a year equating to some 71% with the average annual rental achieved in the city by a host in 2024 being R242 000 per listing.

Another behavioural aspect of investing which is routinely highlighted through a TrueNorth analysis is that investors are often guilty of allocating an incorrect risk profile to their investments.  You are probably thinking that too many investors take too much risk – Bitcoin comes to mind.  While it is sometimes true that investors are too aggressive for too long – carrying the risk of losing gains previously made – this is not the most common misallocation.  It is rather that too many investors are too conservative for too long with a fear that hard-won investments unrealistically do not suffer any capital losses.   This (understandable)

concern then overrides the desire for increased gains, depriving a portfolio of eventual capital appreciation.  An overly disproportionate allocation to assets that don’t lose value can (will) seriously compromise a sensible investment strategy that has a long-term target date.

Living 15 to 20 years longer in retirement than the actuaries have planned for is a mixed blessing.  Who doesn’t want 35 years of life without having to work?

The other side of the equation is of course ensuring that there is sufficient money to fund this luxury.  Perhaps employers will lengthen employment durations, though there is no current indication that this is a trend.

It is not an insurmountable problem that an investor shoulders this additional responsibility on their own.  By following investment principles that have stood the test of time and adjusting behavioural outlooks, a 40-year-old can look forward to a constructive longer retirement than their parents did.

We invite you to discuss this with either your GTC retirement benefit consultant or one of the GTC MAPS team.