By Tracy Jensen, 10X Investments product architect
Many South Africans face the risk of not having enough money at retirement. However, women face the added challenge of earning less than men in equal positions and living longer. So how can women ensure they save enough for retirement?
The pay game
It is common knowledge that on average women earn less than men (a PwC remuneration report of all JSE-listed companies found woman earned an average of 28% less), but how does this impact women’s retirement savings?
This just makes it more crucial that women plan carefully for their retirement and stick to a budget. Instead of increasing lifestyle costs when you receive a salary increase, you should rather try keep your lifestyle at the same level and contribute more to your retirement fund if sufficient contributions are not already being made. This is easier said than done, but it is critical to be disciplined. Another option is to study part time in order to move into a higher earning role.
Living longer means saving more
Latest annuitant mortality data released by the Actuarial Society of South Africa reveals that the average life expectance of a 65 year old South African who has an annuity is age 85.9 for females and 81.5 for males. Since women on average live longer than men, they need to have a bigger pot at retirement in order to fund the same level of income in retirement. Therefore, women need to save more towards their retirement than men do.
Although women tend to lose out here, they generally pay a lower life insurance premium than men and sometimes lower car insurance premiums too. As a result, one way for women to increase their retirement savings is to invest the money they have saved on their life insurance, and possibly car insurance premium, into their retirement fund.
Retirement investing is like shopping
Personal finances are like a shopping trip. If you go shopping without a plan, you are almost guaranteed to spend too much, buy the items you want but don’t need and come out with none of the items you actually went there for in the first place. The same is true when it comes to your finances: If you go in without a plan (i.e. a budget) you are almost guaranteed to go over budget and have nothing left for the items you really need, like retirement savings.
Retirement and your finances go hand in hand because you can’t save for retirement if you don’t know what your end goal is.
So the first thing you need to do is set your goal, which is the amount of income you need in retirement. Let’s assume you need a retirement income of about 60% of your salary. Now that you know your goal, what do you need to save each month to reach that goal? In the example, you would need to save 15% of your gross salary (including your retirement contributions) for 40 years. If you start saving later, you need to save more than this. There are many easy-to-use online calculators available to assist you with this.
Secondly, you need to create a budget and work towards the retirement savings target you just calculated. You may not be able to save 15% right away, but it is important to work out an action plan on how you can get to that level of savings. For example, could you cut out that latte you have on the way to work every morning? This alone will save around R500 a month that you could have contributed to your retirement fund.
Finally, include other savings in your budget. This will help you to avoid drawing on your retirement savings in the event of an emergency. The golden rule is: do not touch your retirement savings until you retire. Otherwise you will just be kicking the can down the road.
A last word on fees
Although this is not specific to women, it warrants mentioning. Fees are crucial. To continue the shopping analogy, you would never go into the shops and buy a dress without looking at the price. So why don’t we apply the same principals to our retirement investments? Make sure that you ask for all the fees and question the providers and your advisor if applicable about this because disclosure is often poor, especially around fees charged as a percentage of your assets (your retirement pot).
Similarly, make sure your benefit statement shows you the return you earned before fees, your total fees and the return you earned after fees.
The key here is that for every 1% of fees saved (as percentage of your assets) you can add up to 30% more at retirement. This sounds implausible, but it’s true. The returns you earn next year are on a smaller retirement pot than they would have been, and the following year on an even smaller retirement pot and so forth. Over forty years, that makes a massive difference.