Most of us expect to retire when we are 65. While the retirement age in South Africa is not regulated by law and you could qualify for a government pension from 60 onwards, 65 is the generally accepted maximum working age in corporate companies and for insurance purposes.
Why 65? Because Germany, who introduced the modern version of retirement, said so. When Chancellor Otto von Bismarck first floated the idea of retirement and government support for retirees in the 1880s, he suggested a retirement age of 70. This was reduced to 65 during World War I. Other countries have since set their own retirement ages, but 65 is still the norm.
Here’s the rub: at the turn of the 19th century, a 40-year-old could conceivably expect to live another 30 years. Either the government pension or your own lifetime savings therefore only had to last an average of 5 years after you had retired at 65.
Over the past century, there has been a deluge of medical advancements improving our life expectancy. Today, many 40-year-olds will probably live another 60-70 years. Scientists even believe the first person who will live to 200 has already been born. Yet one thing remains the same – the retirement age of 65.
This has created one of the biggest socio-economic issues globally. Where previous generations worked 40-45 years while saving for a retirement that would last 5-10 years, younger generations somehow have to save for a retirement that will last as long as their 40-45 working years. Governments, on the other hand, are increasingly struggling to support their ageing populations through grants.
Here’s a not-so-fun fact: 92% of South Africans have insufficient savings at retirement. While we are commonly advised to save at least 15% of our gross (i.e. pre-tax and other deductions) salaries towards retirement, the average savings rate in South Africa is a mere 7%. In contrast, Allan Gray believes even the 15% is too little given the increasing life expectancy rates. They advise that you save 17%, assuming that you save from 25-65 and never withdraw your retirement savings when changing jobs.
If you did not start saving at 25, Allan Gray’s guidelines change as follows:
I don’t know about you, but I find this a rather grim table. I don’t know many 35-year-olds who can save 30% of their gross salary for retirement. And 59% at age 45? A tall order, especially given that we are already forced to make spending cuts in other parts of our lives.
There are two lessons here: firstly, you really do have to start saving for retirement as early as possible. When you are just starting out in your working life, retirement is the furthest thing from your mind. Why would you want to focus on something that will only happen 40 years from now? The only thing worse than thinking about that far-off day though is having it roll around and being hopelessly unprepared.
The second lesson is that we have to start thinking differently about retirement. Instead of viewing it as an extended holiday after 40 years of the daily grind, we need to see it as a change of pace, an opportunity for a second career. Whether that means consulting or monetising your hobby or renting out a part of your house, you have to extend your income earning potential beyond 65.
This does not mean that you should no longer save for retirement – you absolutely have to! But most of us can no longer rely on our retirement savings alone to fund the last third of our lives.
Do not wait until retirement before you start planning for it. Check with a financial planner whether you are on track and how you can improve your savings. Get in touch if you need help choosing one.