How much money you need to retire comfortably in South Africa, according to experts

Oct 25, 2021

The 2021 edition of the 10X Retirement Reality Report points to a deteriorating pension outlook for South Africans.

In the wake of the Covid-19 pandemic, even fewer now look forward to a comfortable retirement, says Chris Eddy, head of investments at 10X Investments. This is evident across all age groups, demographics and income levels.

The 10X report is based on the annual Brand Atlas Survey, which tracks the lifestyles of the 15 million economically active South Africans in households earning more than R8,000 per month.

Alarmingly, this modest cut-off already excludes two-thirds of households in the country

In total, 71% of respondents indicated they had no retirement savings plan at all, or just a vague idea of one. That is a lot of people who could be forced to rely on the kindness of family and friends, or to live off South Africa’s meagre older person’s grant (state pension) of R1,890 per month (R1,910 for those older than 75), said Eddy.

Within the ‘fortunate’ minority, half the respondents still don’t save because they have nothing left at the end of the month. And even among those who are saving, just 7% anticipate a comfortable retirement; 79% fear they won’t have enough or feel unsure.

Most survey respondents (74%) believe they will have to generate some income after they retire. Another 19% are not very sure, leaving just 7% of respondents feeling confident that they are on course for what is increasingly becoming an outdated notion of retirement, based on full financial independence.

Breaking this down into different income groups: a mere 6% of those with a household income of R50,000 and above feel sure they will not have to keep earning after they retire. For both other income groups, it was just 7%.

This highlights once more that achieving a financially secure retirement is less about how much we earn, and more about how much we engage in the process, inform ourselves and save.

But how much is enough, and how do we start a savings plan to get there? Several leading financial services firms weigh-in

The 80% rule

Schalk Louw, portfolio manager at PSG Wealth, notes that many experts recommend using the 80% rule as a benchmark for what you will need to cover your monthly expenses once retired.

“I won’t personally guarantee the accuracy of this figure, but it does give us a basis to start from,” said Louw.

If you currently earn R15,000 per month, and apply the 80% rule, you will need at least R12,000 per month after retirement to maintain your current living standard.

Unlike food products, human beings don’t have a “use by” date, so we have to rely on a safe withdrawal rate to ensure that we do not outlive our savings, said Louw.

According to this rate, you should be able to withdraw 5% of your portfolio yearly without having to use any of your remaining capital, he said.

“This approach is based on the fact that the historical return on the South African stock market (since 1964) was about 8% higher than the local inflation rate and that you would expect to earn slightly less than that in a typical balanced fund portfolio.

“By limiting your withdrawals to 5% of your portfolio, you should still have an additional 5% to 6% growth to cover inflation in the long run.”

Based on a 5% annual withdrawal rate after retirement, Louw said that the amount you will need to save in rand terms would look something like this

R12,000 x 12 months = R144,000 (annual income) ÷ 0.05 (5% safe withdrawal rate) = R2,880,000.

If you don’t properly compensate for inflation in your portfolio, you may fall short of your required total after retirement, said Louw.

“Let’s assume that you are 40 years old and you plan to retire at age 65 (25 years). By using the top of the South African Reserve Bank’s target range, the best-calculated guess we can offer on annual inflation is around 6%.

The 4% rule

Traditionally, financial advisers, savers and retirees have relied on the 4% rule when working out how much to save for retirement and what kind of annual income retirement savings would provide, noted financial services group Discovery.

Simply put, the rule says that if retirees withdraw 4% of their savings annually (adjusting this amount for inflation every year thereafter), their nest egg will last at least 30 years. The rule also requires retirement savings to be split equally between shares and bonds.

This method, Discovery said, is also used to determine the lump sum investors need to provide an acceptable annual income when they retire

For example, if you retire with a final salary of R480,000 a year, you need a replacement ratio of 90% of your final salary, which amounts to R432,000. To ensure you do not use all your saved retirement capital in 30 years, R432,000 should be 4% of your total savings, Discovery said.

This means you would need R10.8 million saved to draw 4% or R432,000 annually. Put another way

You need R432,000 a year (90% of R480,000).

R432,000 must be 4% of your total savings at retirement if you don’t want to deplete your nest egg.

R432,000 is 4% of R10.8 million

Therefore, you need R10.8 million saved at retirement to give you R432,000 a year.

“This retirement theory is not without its critics. Those who question the 4% rule’s relevance say it doesn’t take into account issues such as taxes or varying investment horizons, and also observe that financial conditions when the rule was formulated were very different to the reality in this century,” the financial services firm said.

For example, Bengen’s rule is based on the average long-term annual returns (since 1926) of shares and bonds being 10% and 5.3%, respectively.

75% rule

Plan to have 75% of your current pre-tax income, says financial services firm, Sanlam. “You will most likely need less than 100% of your current income to live comfortably when you retire as some expenses fall away once you retire.

Ask yourself these questions:

1. What would I no longer pay for when I retire? The things I don’t need or no longer have as expenses.
2. What would I still pay for when I retire? The things I need to cover like living expense and lifestyle aspirations.
3. What expenses may start or increases? This may include new hobbies, aspirations like travel, and healthcare costs.
4. Determine your income replacement ratio, said Sanlam. This is the income you get after evaluating the questions above, expressed as a percentage of your current income.

Example: earning a monthly income of R50,000 pre-tax

Allan Gray offers a similar guideline around saving. Aim for an income of 75% of your final salary

It is widely held that a retirement income equal to 75% of your final salary will allow you to live comfortably during retirement, it said. “This figure accounts for the adjustments many people make as they age, for example, no further retirement savings contributions but higher medical costs.”

To assess how much you will potentially need, consider the following factors

• Do you expect to own your own home when you retire having paid off your bond? If so, you can remove home payments from your budget. If you expect to buy or rent a bigger home between now and when you retire, you’ll need to increase your allocation for housing.
• Will your car be paid off or are you planning to buy an expensive car that will need to be paid off during retirement?
• Medical expenses. As you get older, your doctor’s visits, medication and medical aid contributions are likely to start increasing. In addition, medical inflation is usually higher than the average inflation.
• Will you still need to pay your children’s or grandchildren’s school fees? Education inflation is typically around 4% higher than the average inflation. Aim to put away at least 17% of your salary from age 25

“Assuming that you will be comfortable living off 75% of your pre-retirement salary, our research indicates that saving 17% of your salary is a reasonable starting point for the 25-year old saver.

“This amount increases dramatically the later you start. You need to save 22% if you start saving at 30, up to 42% if you start at 40, and up to 59% if you start at 45,” Allan Gray said.

It is important to note that these numbers are simply averages and assume a consistent, inflationary salary increase each year, that you retire at 65 and that you earn an average return of consumer price inflation (CPI) plus 5%, it said.

The 15% rule

The general rule of thumb for a comfortable retirement is 15%, noted Gus Van Der Spek, a developer of upmarket retirement village Wytham Estate

“15% of your salary should be put aside for your entire working career of around 40 years. For those wanting to retire in luxury, 20%-plus is advised. Also, bear in mind that what R1 is worth now will differ by the time that you retire,” he said.

Van Der Spek shared the advice given to him by financial planners saying, “multiply your needs by 300. Simply put, if you currently live on R50,000 per month, multiply this by 300 to determine what you will need to maintain a luxury lifestyle post the age of 60.”

Van Der Spek’s comments dovetail retirement expert Andre Tuck, a senior Investment consultant at 10X Investments.

Tuck pointed to three old school ways to ‘guesstimate’ your retirement goal:

1: Multiply your final annual salary by 15

“Let’s say your take-home pay is R25,000 a month in your final year of working, giving you an annual salary of R300,000,” said Tuck. “To maintain your lifestyle after retirement, you’ll need around 15 times your annual salary, so 15 x R300,000, meaning a lump sum of roughly R4.5 million,” he said.

He added, however, that if you are hoping to do things you didn’t do during your working years, for example, travel, you should rather multiply your final salary by 17, or even 20.

2: Save R1-million for every R5,000 you want to draw down as a pension every month

You can also get a rough idea of how much money you’ll need to have saved at retirement by assuming that you will need R1 million invested in an annuity for every R5,000 you want to draw a month once you’re retired. So, if you want to draw a monthly pension of R25,000 a month, you will need to have squirrelled away R5 million by the time you retire

3: Multiply your monthly needs by 300

One of the simplest calculations is to multiply what you think you’ll need per month (say R25,000) by 300 to determine the lump sum you will need to have saved (R7.5 million in our example). This option gives a slightly higher figure than the other two options, which is a good thing, says Tuck.

“The more money you have available to invest once you retire, the better your lifestyle will be and the more likely you will be to withstand the impact of unexpected events, such as the current pandemic,” he said

We thank Business Tech for this article.

SARS will look at your Facebook, credit cards and other data to see what tax you owe, say experts

Oct 25, 2021

The issue of lifestyle audits and the use of third-party data by the South African Revenue Service (SARS) has once again come under the spotlight, with tax experts warning that taxpayers must disclose any substantial transactions, including those made with cryptocurrencies.

Speaking in a panel discussion at the recent South African Institute of Taxation (SAIT) Tax Indaba, Jacques van Wyk, chief executive of JGL Forensic Services, noted that the introduction of crypto assets has complicated the investigative process at a forensic level because it challenges tax jurisdictions.

While van Wyk is pro-crypto taxation, he believes that people do not heed SARS’ warnings. He urged SARS to use its data and set the necessary examples, which would nudge those who are purposely non-compliant to re-evaluate their position on the matter.

Data collection

With substantial third-party data at its disposal, SARS can view anything from your new yacht to credit card transactions and foreign investments, says specialist advisory firm Tax Consulting SA.

“Through mutual information-sharing agreements with other countries, they can gain access to an individual’s offshore transactions,” the firm said.

“However, the crypto-asset analysis goes beyond third-party data analysis. The digital information around crypto is layered, complex, and requires many human resources to examine and rework. SARS is aware of the demand and the subsequent workforce shortage to cull through all the data.”

The firm noted that social media is an incredibly rich source of information, which means it’s not advisable to show off your new sports car or crypto gains while owing money to SARS.

“If you are one of the elusive crypto millionaires who cashed in on the global crypto wave, you might have to reconsider the safety of your hiding spot,” it said.

“A sure-fire way for SARS to gauge that something is amiss is to look at someone’s lifestyle and to see if what they are spending is in line with what they are earning. The burden of proof ultimately falls on the taxpayer to explain any discrepancies.”

Understanding SARS’ intent behind enforcing crypto tax compliance

Former acting SARS commissioner Mark Kingon says that the revenue collector has gone on a massive recruitment drive in recent months, focusing on employing forensic auditors and veterans who can assist with upskilling the younger specialists.

Kingon said that one of the specific objectives of SARS is to increase and expand the use of data.

Where simplifying the processes using data, analytics, and artificial intelligence fails to encourage compliance, SARS will employ its comprehensive knowledge management system to investigate and police non-compliance.

According to Thomas Lobban, head of crypto-asset taxation at Tax Consulting SA, local investors are often not open to voluntary compliance.

He cautions traders who boast about their crypto gains on social media platforms that it could land them in hot water if SARS were to take note of their feeds.

Non-compliance is still proving to be an issue in the crypto asset space among South Africans, said Lobban.

“This stems largely from a misunderstanding of the tax laws applicable, paired with the overarching sentiment that SARS is not entitled to tax them on their gains.

“It is understandable why SARS would embark on a compliance enforcement exercise. In cases where a taxpayer is not able to prove the source of their income used to fund their lifestyles, SARS is forced to dig deeper.”

You must report

Keith Engel, chief executive of SAIT, further expressed his concerns about taxpayers who believe they are playing a game with SARS by seeing how long they will get away without paying their taxes.

“Whatever your profits, you are legally obligated to report them. If you don’t report them, it is tax evasion,” Engel said.

“SARS is committed to getting third-party data from the more prominent crypto trading platforms. While SARS is getting this done, people think they can continue to get away with it, but they will get caught two or three years down the road.

“If those individuals didn’t report the income, SARS can go back forever. When they get you, they will want the tax, plus interest and penalties. Then you’re really in trouble.”

The consequences of a lifestyle audit can severely impact your relationship with SARS if irregularities come to light. If you suspect you are not fully compliant, it is wise to disclose your earnings and, if necessary, seek relief through the Voluntary Disclosure Programme (VDP).

If SARS decides to audit your lifestyle, the VDP window is no longer an option – even after being notified of a possible audit, said Tax Consulting SA.

Article originally posted on Business Tech.

The pandemic drives a need for better, deeper forecasting and analysis

Oct 1, 2021

Even as accountants are doing their best to help their organizations deal with the risks and uncertainties brought by the pandemic, the COVID-19 pandemic and the Delta variant have upended the traditional tools that accountants and the finance teams at organizations have been using to predict their performance and the results of their strategies.

A recent report from the Institute of Management Accountants discusses how predictive analytics, combined with knowledge of the business and scenario planning, can help organizations make better forecasts.

“Companies have been able to use past data to help them forecast trends for the future has been part of forecasting traditionally, but with the much more competitive global marketplace, and then the pandemic, historical data is often not very predictive because things have been changing a lot,” said IMA Research Foundation board member Kip Krumwiede. “Companies really have to expand the type of data that they’re using to help forecast what the demand will be for a product. Not only that, but whether different scenarios can play out, and how we can prepare for those. What is the probability of those different scenarios? This report profiles the basic tools that really any company can use, even if they can’t afford expensive software, to be able to reduce the uncertainty about the future, and use more data that can be more current and a better leading indicator of trends in your market.”

The report relates to Part 1 of the IMA’s Certified Management Accountant exam, which covers competencies related to financial planning, performance and analytics. It can offer a guide for those interested in learning more about these competencies or who are studying to take the CMA exam. It provides nine ways that a company can use to help forecast future demand and risks. “They can get a much better idea of the probability of different scenarios playing out and really see what’s ahead,” said Krumwiede.

Uncertainties such as those around supply chain disruptions in computer chips, raw materials and most recently paper products have been adding concerns for companies and their future planning.

“Companies do their strategic plans, and then they often make a forecast based on one scenario that they think is most likely, but supply chains are much more uncertain these days,” said Krumwiede. “Toyota had to cut production by 40% because they couldn’t get the chips that they needed. What can help a company in that situation is they can identify one or two real key uncertainties that could make a huge difference. For Toyota it can be not having a sufficient supply of chips. Maybe another one is an ultra-high increase in demand for electric vehicles. If they identity those as really key risks, they could break those down into different aspects and estimate the likelihood of those different aspects and then build a model that has those variables … and then run a Monte Carlo simulation and really get a much better feel for what the odds are of having, let’s say, a scenario where they don’t have enough chips, but demand for electric vehicles doesn’t take off.”

It’s important for organizations to do planning around different “what if” scenarios and adjust their plans accordingly.

“Companies have got to do better these days to anticipate different scenarios, and not just have a plan A, but a plan B, plan C, and plan D, because increasingly it’s likely that you’re going to need your plan B or plan C or plan D,” said Krumwiede. “There’s just so much disruption in the markets and the supply chain. The impression that most CFOs and their financial planning and analysis people have is that you’ve got this really sophisticated software to do this and build very complex models, but the truth is you can have the best software in the world, but you’ve got to understand what data is the most important to you for your particular strategy and then go find the data that will help you to predict that. It’s not the other way around. It’s not the data that tells you what to analyze. It’s your strategic plan that should tell you what you really need to know. Then there’s increasingly all kinds of ways that you can find that data that are not traditional approaches.”

Organizations can’t just rely on their software to make such predictions. Accounting expertise is needed to help make decisions. “Accounting is one of the professions in which everybody talks about the role of automation in replacing accountants,” said IMA CFO Russ Porter, who previously worked for 28 years at IBM. “People sometimes exaggerate about the death of the accountant and that everything we do can be replaced by technology. I don’t believe that at all. Are there things that can be automated? Absolutely, but I believe there’s a lot more to the accounting profession today than simply bookkeeping.”

The IMA is planning future follow-up reports that discuss building a model with multiple variables to help forecast demand, using Tesla as an example. After that there will be a report on profitability analytics to help decide on the best scenario to use.

Article with thanks to Accounting Today