What is the retirement industry doing to improve the financial outcomes of those saving for retirement? Is the retirement sector being innovative enough or simply doing what it has been doing all along, asks Graham Knight, Certified Financial Planner at Alexander Forbes Financial Planning Consultants.
Many people will hardly be able to replace their current income come retirement. In most cases, the replacement value for every R1 saved in a pension fund is about 30c. The term “replacement value” means the percentage of their final employment remuneration which a retired employee will earn from pension fund savings.
Cashing in funds before retirement is the number one reason most people can’t retire with a replacement value near their final salary. Some retirement funds have launched in-fund solutions to seamlessly encourage employees to leave their money invested with their current employer when they change jobs as opposed to cashing in their funds.
The biggest problem that advisers encounter is fund member’s lack of understanding that contribution rates to the employer pension funds are usually based on ‘pensionable salary’ which is often a smaller percentage than the ‘Total cost to company’ package of the employee. This lowers the replacement value at retirement because the member has been saving a lower percentage of total remuneration than pensionable salary and the member is used to living on the full remuneration package.
The retirement industry has started making some changes like adding member education sessions to employees to explain how to save, for how long, and to further create awareness around the benefits and options available to them within the retirement fund.
Some retirement fund companies have added a replacement value calculator on their websites so employees can calculate their replacement value at retirement.
A few funds have been marketing the fact that they charge lower fees, which is beneficial to the member’s replacement ratio because high fees over a long period of time affect investment growth and erode the amount of capital in retirement. It is important to know that fees are not the only factor which should be considered when investing. There are many factors which will affect the growth of your retirement capital such as how active the investment portfolio management is, as well as the asset allocation of the portfolios and the performance of the asset classes over time, and the contribution rate. That’s why it is helpful to consult with a financial adviser during your retirement planning journey to understand whether you are on track to secure a sufficient replacement value. The more you are able to save each month the more likely you are to achieve your goals.
Retirement funds and companies have increased the percentage they allow employees to contribute, thus allowing them to save a bigger portion of their earnings. This definitely increases their replacement value.
Employees who have had their contributions invested for their whole working life and who preserve their retirement funds when they leave and start new employment, end up with a far better replacement value than those who cash in their funds along the way.