How to help employees become retirement ready

Johannesburg - Allan Gray research indicates that members of their retirement funds who are between six months and two years away from reaching retirement have a low level of engagement when it comes to their retirement investments. This is according to Everjoy Gumbo, specialist in Group Savings and Investments at Allan Gray.

She reveals that only 22% of Allan Gray Umbrella Retirement Fund members who were set to retire within six months over the course of 2024 actively engaged with retirement tools provided by Allan Gray, while only 65% of members who were two years away from retirement accessed their online accounts year to date.

“While many members likely know how much they are contributing monthly towards their retirement investment, they are in the dark about the rest of the detail – and are therefore not able to assess whether or not they have accumulated adequate funds to provide them with a retirement income that can sustain their lifestyle.”

How to assist employees to get better outcomes

Gumbo says employers should encourage employees to check in on their retirement investments annually.

“A simple way for employees to check their progress is to take stock of their current savings, think about the lifestyle they want in retirement, and then compare it with what their current contributions are likely to deliver,” notes Gumbo. “This helps employees to understand – at the very least –  whether they are on track for a comfortable, sustainable retirement, as well as make informed decisions about when to retire.”

How employees can track their retirement investments

Gumbo explains that one of the key ways employees can track their progress towards retirement goals is by reviewing their net replacement ratio (NRR). In a retirement context, NRR is the projection of the portion of an individual’s pre-retirement earnings that will be replaced by their post-retirement income.

“The retirement industry consensus view is that an NRR of 75% is ideal to sustain a comfortable retirement, but of course this is an average and the true amount will differ between individuals,” says Gumbo.

As an example, if one earns a monthly income of R10 000 just before they retire, a post-retirement income of R6 000 per month works out to a replacement ratio of 60%.

Gumbo says that the NRR gives employees a clear view of whether their retirement savings are on track. It shows how much they are likely to have saved by retirement if they keep contributing at current levels, compared to what they would need to maintain their desired lifestyle, come retirement.

“Since the NRR is influenced by factors like age, savings, contributions, investment growth, lifestyle, and income streams, reviewing it regularly at different life stages helps employees plan and make adjustments to secure a sustainable retirement.”

She says that some providers have developed NRR tools to allow employers to review the overall NRR for their employees, enabling them to gauge how many employees are on track to retire comfortably and how many may need some intervention.

“The Allan Gray Umbrella Retirement Fund’s NRR tool for its members allows employers or their scheme advisers to tweak the various metrics to determine the impact of changing certain aspects, such as retirement age and contributions for the group as a whole.”

Gumbo says tracking retirement using an NRR tool is something the average member should be undertaking annually, more so when their circumstances change, to ensure that they are on track to meet their retirement savings goals. 

Improving retirement outcomes

Gumbo explains that employees can improve their retirement outcomes in several ways. “By increasing contributions – whether through salary-linked deductions, regular check-ins, or ad hoc top-ups from bonuses – members can steadily boost their retirement savings. Just as important is resisting the urge to withdraw early under the two-pot system. While a portion of savings may be accessed annually, doing so can reduce long-term growth and carry tax implications. Tools like Allan Gray’s Leaving your employer calculator can help members understand these trade-offs,” she says.

She adds that members may need to adjust their lifestyle expectations or even consider delaying retirement to allow more time to save and reduce the number of years their savings must support them.  

“Seeking advice from an independent financial adviser can also provide valuable guidance,” concludes Gumbo.