I recently tested a beta version of a new retirement calculator created by Sanlam Employee Benefits for their corporate clients to assist new employees in selecting their retirement fund deductions.
While the calculator needs some work, it presented an interesting concept: if, when you make a decision about the amount of money to deduct off your salary for retirement, you were shown immediately the income it would provide you in retirement, would it affect how much of your salary you would contribute to retirement?
The experience for most people starting at a new company is receiving a wad of papers to sign which will determine their medical scheme and retirement fund deductions. Companies usually provide a choice around what percentage of your salary you want to contribute towards retirement. The problem is that employees have no idea of what the numbers actually mean in terms of their future retirement benefits so most employees will select the lowest possible contribution in order to maximise their take-home pay.
According to Mayuri Reddy, Market Strategist at Sanlam Employee Benefits, the rule of thumb is that you need to aim for 75% of your final salary on retirement. This assumes that by the time you retire you no longer have to provide for mortgage payments, school fees or retirement savings, so you need less to live on each month.
When using the calculator, a young 25-year-old starting their first job would find that if they contributed 15% of their salary each month to their retirement fund they would be able to retire with 75% of their income at the age of 65. If, however, they saved 20% of their salary they could retire by the age of 60. If they only saved 11% of their salary, they would have less than 60% of their final salary in retirement.
Would this information be incentive enough to make sure they selected at least 15% to meet their minimum retirement income objectives, or even 20% to allow them to retire earlier?
And what about the late savers, for example a person who at the age of 35 changes jobs for a pay rise and cashes in their retirement fund. The calculation would tell them that now, in order to retire at the age of 65 with an income equal to 75% of their salary, they have to contribute 23% of their salary to their retirement fund. Would this be sufficient motivation to use a portion of the pay rise to boost their retirement savings?
Or what if, upon leaving their first job, they received a calculation showing them that if they cashed in their retirement fund they would have to increase their contributions from 15% to 23% in order to retire with sufficient income. Would the person have rather preserved their funds?
Currently the average retirement contribution is around 11%. Sanlam has enough data to track behavioural changes once the calculator is introduced, so it is going to make an interesting study in human behaviour. Do we make better decisions for our future if we have the correct information or will our immediate needs prevail?