How ready will you be for your retirement? It is likely that when answering this question, you’ll consider factors such as your asset base and savings rate, the amount of time you have left to invest, an evaluation of your overall health and an estimation of your life expectancy.
However, a recent study by the US-based Pew Charitable Trusts (Pew) highlights an additional consideration to take into account: the generation in which you were born.
According to its, Retirement Security Across Generations Report, Pew asserts that following the Great Recession of 2007 – 2009, members of Generation X (those born between 1966 and 1975) are least likely of all preceding generations to maintain their quality of life once they retire.
Older generations more keenly aware of the Great Depression tend to approach their finances more conservatively and are not as weighed down by debt. Younger generations have longer investment horizons, and consequently more time to recover from the recent global downturn, these were excluded from Pew’s analysis.
Gen-Xers are sitting somewhere in the middle. While it is generally recommended that your retirement savings replace at least 70% of your pre-retirement income, Pew estimates that members of Generation X in the US will replace on average only about 50%.
What can we take away from this study that may apply to South Africa’s own Generation X investor base?
Importantly, Pew highlights that even before the Great Recession and despite strong gains in financial net worth, younger cohorts were less prepared for retirement than previous cohorts were at the same age. Pew attributes this to “a lack of savings and wealth accumulation among Gen-Xers”.
The same could arguably be said for a significant portion of South African Gen-Xers, with a major contributing factor being the demise of the defined benefit pension fund. In previous generations, most employees would automatically have gained membership to a pension fund from which employers committed to pay a set percentage of an employee’s final salary prior to retirement as retirement funding. This guaranteed a generous retirement pay-out regardless of how the employee, company or investment markets were performing. While offering a very favourable proposition to the employee, the defined benefit pension fund resulted in enormous investment risk for the employer. In many cases, it lead to near-fatal liabilities as financing these schemes became increasingly challenging.
As a result, defined benefit pension funds have all but been replaced with defined contribution pension funds, where an employee’s ultimate retirement income is dependent on how much is saved, how these savings are invested and for how long they remain invested. This places far more onus on the individual and requires a greater level of active participation. Increased personal responsibility coupled with generally low levels of financial education and heightened pressure on South African consumers unfortunately means that most investors are making inadequate retirement provisions.
Pew’s study also points to significant debt accumulation among Gen-Xers. With asset to debt ratios declining in each generation when compared to the one that came before, Gen-Xers’ assets were valued at less than twice their debt in 2010. While Gen-Xers would be most likely to increase debt levels as they maintain mortgages, pay educational expenses and seek car loans in addition to building assets for the future, this also points to an increasing reliance on debt in general.
This is also the case in South Africa. In its most recent Quarterly Bulletin, the South African Reserve Bank placed household debt at 75.5% when expressed as a percentage of disposable income. The cost of servicing this debt is sitting at 7.7% of disposable income. With South Africans already relying so heavily on debt to finance living expenses, lifestyle choices and luxury purchases – and with the cost of this debt eating into what remains of their disposable income – low priority is placed on making suitable provisions for retirement.
While the situation may appear concerning, there is good news too: Gen-Xers, who are now between 38 and 47 years old, still have time on their side. Assuming a retirement age of 65, the eldest in this generation have at least 18 years left to save towards their retirement. With careful planning and a bit of budgeting, Generation X still has time to swing statistics in their favour.
For members of Generation X – or indeed any investor concerned about the standing of their retirement portfolio – it will start with a thorough assessment of the progress they’re making towards their retirement goals. Here, the assistance of a financial intermediary may prove valuable, especially for investors who do not feel comfortable evaluating their finances on their own. A qualified intermediary can assist in calculating how much investors will need to retire comfortably, how much they should be saving to reach this target and how their savings would best be invested.
Of course, implementing a revised savings strategy will likely require a number of behavioural changes. Monthly budgets will need to be revisited to see where excess spending can be curbed and amounts can be reallocated to retirement investments. Debt – especially relating to credit card or retail account purchases – will need to be managed more carefully and large luxury purchases should ideally be saved for in advance. Most importantly, retirement savings should be deemed untouchable until retirement becomes a reality. If at all possible, investors should resist the temptation to cash out corporate retirement benefits when changing employment so that their savings remain invested for as long as possible and they draw maximum advantage from compounding returns.
While Pew’s study does highlight concerns about Generation X’s readiness for retirement and points to several factors that may need to be addressed to heed these concerns, Gen-Xers have the distinct advantage of still having time left to invest. With timely intervention and proper planning, there is therefore no reason that Gen-Xers should have the shine taken off of their golden years.
Nick Battersby, PPS Investments Chief Executive Officer