There are few strategies more important than making adequate provision for your golden years. A bad retirement strategy, or lack of one, can lead to misery and poverty. Proper provision can ensure comfort and dignity in old age. There has recently been discussion in Australia of moving the retirement age beyond the current 65, to give people a few more years to provide for their retirement. We discussed this, and a few other issues around retirement planning, with Craig Aitchison, GM of Corporate Member Solutions at Old Mutual Corporate:
ZAC: What are the benefits to the individual of a later retirement age, moving, say, from 65 to 70?
CA: For an individual who is saving for their own retirement, it gives them a double benefit. First, they have a few more years to grow and even contribute to their retirement savings. Second, they need a little less savings because they have shortened the time they might spend in retirement. This all translates to being able to afford a higher income in retirement.
ZAC: What are the benefits to the state/the economy?
CA: For a nation like Australia or the UK, where they want to increase the age at which their state pension is paid, it helps reduce the burden to the state of the state pension. The state pension is becoming unaffordable in these countries. The state pension is usually paid for by the tax payers, and with people living longer and longer, there are now far more pensioners for tax payers to support. Extending the retirement age helps manage this impact.
ZAC: Is such a move to a later mandatory retirement age likely in ZA?
CA: It is unlikely in the foreseeable future. South Africa has actually gone the other way, decreasing the age at which the State Old Age Grant (SOAG) is available, down to age 60.
ZAC: If there is no change, can you suggest a few other ways in which people can better prepare or provide for their retirement?
CA: The best advice I heard was:
1. Start saving as early as you can
2. Never cash in those savings until retirement – especially when you change jobs
3. Save as much as you can
4. Save a regular, budgeted amount every month.
ZAC: Do you think employers and the financial sector could do more to advise people of the possibilities and pitfalls surrounding retirement planning?
CA: According to our research, employees would like assistance from their employers, in particular in the form of information and literature, financial planning workshops and access to face-to-face advice.
ZAC: Many people move from job to job during their working lives. What are the dangers of this, in terms of securing and growing their retirement savings?
CA: Currently our retirement system allows employees to receive cash for all their retirement savings that they have built up with their employer. This is very popular option which most people take, with the result that the money is used for something else. The impact of this on the amount of savings we have at retirement is massive, and one of the main reasons why on average retiring employees face a 70% drop in income.
ZAC: Do you think the tax system in ZA could be more supportive of those who do save for their retirement? If so what might be done?
CA: I think the tax support is reasonably good in South Africa. In fact, changes announced to the tax system which will come into effect in March 2015 have actually increased tax deductions for most employees who make retirement savings contributions. Part of the challenge in South Africa is to help people moderate their use of debt, and to make saving a part of our monthly budget, so that we do so in a regular, planned way.
Conclusion:
Retirement provision is a bit like birth control. If you don’t get it right in advance, there isn’t much you can do once you are in trouble.
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