12Aug, 2020

Retirement in a post Covid-19 world

By: | Tags: | Comments: 0 | August 12th, 2020

With jobs in South Africa being shed at unprecedented rates – unemployment is projected to reach 50% by the end of the year – the majority of South Africans are about to get a lot poorer. And it’s going to impact not only on our lives today, but on the kind of lives we planned for the future.

If your employer is struggling to keep the company afloat and has had to reduce your salary, your retirement fund contribution (usually a percentage of your salary) will be less too. Some employers have even applied for temporary relief from the obligations placed on them by the Pension Funds Act which, if granted, means that they may not be paying anything into the fund on your behalf.

If you have been retrenched, you may be forced to cash in your retirement savings in order to continue paying the bills and keeping food on the table. This can have a catastrophic effect on your ability to retire comfortably when the time comes.

On the whole, South Africans are notoriously bad at saving for retirement, with only 6% having accumulated sufficient savings to retire comfortably.

Even before the pandemic struck, less than 9% of earners preserved their retirement savings when they changed jobs. Younger people, in particular, tend to job hop frequently, and cash in their savings each time they leave a company, only waking up much later in life to the importance of saving for retirement. By then, it’s virtually impossible to catch up.

But it’s not just the young and thoughtless who may be wishing they’d saved more or started saving earlier. Even those who have prepared well could be in trouble.

Since March 2020, the central bank has cut the key repro rate by a total of 300bps. Or, in other words, interest rates have dropped from 6.25% to the current 3.5%. While this is good news for borrowers, retired people living on the interest earned on their savings will have considerably less money each month than they bargained for.

So what can you do if you’re struggling to make ends meet right now?

First and foremost, resist taking on any more debt, especially ‘bad’ debt (that used to buy consumables or items that decline in value). If you’re maintaining your previous lifestyle by racking up more credit card debt, you’re heading for disaster. When the President speaks about austerity measures and belt tightening, he is referring to all of us. We need to seriously evaluate how we spend our money and eliminate non-essentials.

Consider ‘downsizing’ your home or car. The status that comes from living in a mansion and driving a luxury motor vehicle is important to some people, but it’s not worth the financial stress that comes from struggling to maintain an unaffordable lifestyle.

“We saved over R2000 a month on car repayments,” says Mrs M, “just by trading in my husband’s big SUV and buying a smaller car. Everything about the new car is cheaper – from filling the tank to servicing, and replacing tyres. It still gets us from A to B in comfort. And it’s much easier to park!”

Making the decision to sell your home is a little trickier. It’s a buyer’s market right now and you may not be able to achieve your selling price, especially on a property in the higher price bracket. If you’ve owned your home for a while and your bond has been partially paid off, consider approaching your bank to negotiate an extension on the loan period to bring down the monthly repayments.

Selling your home and using the proceeds to rent elsewhere, can only be a short term solution. You never want to be in a position where you are using your capital to fund monthly living expenses. However, in some circumstances, it may be the only option until the situation improves.

If the bills are piling up and you are unable to meet your commitments, don’t just ignore the situation and hope for the best. Speak to your creditors to let them know of your difficulties and negotiate a more affordable repayment plan. If you need more help, consider applying for debt counselling.

This is a formal plan introduced by the National Credit Act to assist over-indebted consumers. You’ll be placed under Debt Review and protected from legal action by your creditors. Your debts will be restructured and you will pay a single, reduced monthly amount that you can afford. This repayment plan becomes a legally enforceable court order.

During the period that you are under debt rescue you cannot incur any additional debt. You will also receive advice on how to budget and make better spending decisions once you are debt free.