Don’t shun workplace benefits if you want to build a strong financial life

When you are struggling to pay for accommodation, transport and food as well as meet your debt repayments, a job offering a higher take-home salary can seem more attractive than one with compulsory deductions for retirement savings, medical scheme membership or group life and disability insurance.

But focusing only on the amount that lands in your bank account each month can be a costly mistake.

Poor choices

Most employers now offer cost-to-company packages that let employees choose which benefits to fund, Geoff Baars, chairman and chief executive of NMG Benefits, said at a recent media event.

As living costs rise, employees increasingly opt out of benefits or choose the cheapest options to boost take-home pay and meet immediate needs. Many are making what Baars considers the wrong decisions.

He said recently some employees had left his company to take up jobs at a competitor that offered a lower gross salary, but a higher take-home pay as it was not compulsory to contribute to a provident fund or medical scheme.

But not having healthcare cover, saving for retirement or having life and disability cover can undermine your financial wellbeing and leave you vulnerable to financial shocks.

Balance your short- and long-term needs

A balance between your immediate and long-term needs is often required and advice can help you find it.

Benefits are particularly hard to afford when you start work on a salary that barely covers basic expenses.

But with the most working years ahead, young employees have the greatest need to protect their ability to earn an income. Disability benefits are often cheapest in employer schemes, Baars said.

Retirement may seem distant, but by starting to save at a young age you will make the most of compounding. Opting out of a retirement fund until later in your working life will cost you even if you can only afford a small contribution when you are young.

Siphamandla Buthelezi, chief operating officer and executive head of platforms at NMG, said a lot of people who are saving for retirement are doing so only because their employers make it compulsory to do so.

When you start a new job, he says, do not complete the benefit forms without advice or you may simply choose the cheapest option.

Find out what your retirement fund contribution options are and devise a contribution strategy, Nomawetu Msutwana, the branch head of benefit consulting and principal benefit consultant at Simeka Consultants and Actuaries, suggests in the latest Sanlam Benchmark Survey Insights Report.

She also suggests young employees get advice about drawing up a budget, saving for emergencies and how to use credit wisely.

How retirement savings go off track

Compulsory retirement saving is a good start, but rising lifestyle costs, expensive short-term debt and unplanned expenses can tempt you to raid those savings.

Your target for retirement should be to have enough savings to replace 60 to 75 percent of your pre-retirement income – your replacement ratio.

But NMG’s data shows that many fund members’ savings are on track to replace only 30 percent to 38 percent of their income in retirement, Trevor Kingsley-Wilkins, head of retirement fund consulting at NMG, told the media event.

He says the reasons why members are not on track for a good income include:

Starting too late: beginning at 35 instead of 25 sacrifices a decade of compound growth.

Contributing too little: you typically need to save about 15 percent of income each month.

Withdrawing from the savings pot or the vested pot when changing jobs: preserving every pot − or making extra contributions to replace withdrawals − is vital.

Investing too conservatively: without inflation-beating returns, members effectively become poorer each year.

Msutwana says you should regularly review your retirement fund statements and seek personal advice. Understand your benefit statements and projected replacement ratio, and check whether you are saving enough, have adequate insurance, can afford a home loan, are providing for your children’s education and are using tax incentives effectively.

The debt pandemic

Unmanageable debt is another reason people do not save enough. One in three South Africans struggles to meet repayments, Guy Chennells, chief commercial officer for Discovery Corporate and Employee Benefits, said at the company’s Retirement Fund Forum.

He described debt as an ongoing pandemic: 46 percent of South Africans say it prevents them from saving more for retirement. When short-term debt costs more than investments earn, prioritising repayment can make sense.

Learning to manage money well is key to keeping your retirement savings intact regardless of income, Discovery’s data on retirement fund savings pot fund withdrawals shows.

Discovery’s retirement fund plans to let members temporarily divert contributions to debt repayments while preserving existing savings. The scheme includes incentivising members to learn to manage their money and debt and rewards that can replace the lost contributions at retirement.

Stop justifying poor decisions

Over a 40-year career, we receive only about 480 pay cheques from which to save for retirement, Brian Karidza, the head of Actuarial & Benefits Administration at the Government Employees Pension Fund, said at the Sanlam Benchmark survey release. Yet under pressure, households often choose immediate needs over long-term savings.

We may rationalise this by pointing to someone who died soon after retiring and questioning whether we will reach retirement age. But people tend to underestimate how long retirement may last until they get there, Karidza said.

Ten years before retirement, Msutwana suggests checking whether your retirement savings plan is on track and putting a plan in place to retire debt-free. If you are behind, individual advice can help you build a recovery plan, she says.

About five years before retirement, review your annuity or pension choices, including your fund’s default option, as well as your medical scheme needs and estate plan.

Choosing healthcare on price can backfire

Short-term thinking also shapes healthcare choices, says Karin Mitchelmore, executive head of healthcare consulting at NMG. Many employees focus on price without checking whether the cover meets their needs.

A cheaper option may leave you with substantial medical bills after illness or an accident if reimbursement rates are below specialists’ charges or the option imposes sub-limits.

Only about 30 percent of medical scheme members have gap cover, although Mitchelmore believes at least 50 percent should have it to reduce out-of-pocket medical expenses.

Unexpected healthcare costs can also derail your long-term savings plans and cost you in time off work if you have opted out of an income protection or disability group scheme benefit.

Get guidance as soon as you can

If your employer or retirement fund offers financial education, benefits counselling or access to an adviser, use it as early as possible to balance immediate and future needs.

Most members engage with retirement planning too late, Karidza said. Advice throughout your career can help you protect savings from emergencies, debt and pressure on the household budget.