To mark "Women's Week" Personal Finance would like to make a contribution to the empowerment of women in broader society by publishing an extract from a book written on retirement by Personal Finance columnists, Bruce Cameron and Magnus Heystek. The extract deals with the disadvantageous position of most women at retirement and what you need to do to rectify your situation.
Many women, in what are supposed to be their golden years, find themselves destitute
and abandoned, living in hovels and barely able to feed themselves.
The causes for this include:
* Women live, on average, longer than men so they need more funds set aside to ensure a
comfortable income. At age 60 a woman can on average expect to live 3,6 years longer than
a man;
* Divorce. Many women still go to the altar believing they will live happily ever after
and that they will be provided for by a doting husband - but almost one in two marriages
ends in divorce. Divorce can end in poverty for a woman because she has been out of the
job market and cannot find employment;
* The various marriage contracts available in South Africa affect how much a woman may
have available for retirement funding. This is because assets taken into the marriage and
built up during the marriage are valued and accrued to the different parties in different
ways.
It is important that you understand the manner in which you are being married, for
example in or out of community of property, as well as how assets you have accrued before
your marriage and during your marriage will be recorded. You should get proper legal
advice from a lawyer you know and trust before getting married.
It may seem that a marriage contract has nothing to do with retirement when you are
thinking more of children and a new home. Retirement most definitely has an effect on
marriage;
* Women most often have custody of children from a divorce and incur additional costs
not covered by alimony payments. South Africa also does not have a very sound record in
the enforcement of support payments. This means a mother has to use funds that would have
been saved to support her family;
* Women generally earn less than men and are often employed in casual jobs, which do
not have retirement scheme benefits;
* Career breaks to raise a family are still common. This can mean no income and no
contributions to retirement funds while not working, unless you are merely taking
maternity leave. Career breaks also limit promotion prospects with the knock-on effect on
earnings and retirement savings;
* The glass ceiling, which many women still struggle to break through on the corporate
promotion ladder, again limits retirement savings; and
* The retirement age for women is often younger than for men. In 1995 legislation was
updated and the retirement age for both sexes was made 55. But the taxman has put the
updated legislation on hold until March 1, 2000. Until then a woman retains the option to
retire from her pension fund at the age of 50, five years earlier than a man. It is not a
good idea to take advantage of this concession.
The most damaging impact on a woman's financial hopes is made by the extra years that
she can expect to live and the average of six years she takes off to have a family. The
two reasons combined are a poverty trap.
It works like this. Let us take two women (Ms A and Ms B) and these assumptions. Both
start working at age 21. Both put an initial R50 a month aside for retirement funding.
Ms A continues to work without a break until she retires at age 60. Ms B takes six
years off to raise a family at age 28.
During the six years Ms B makes no pension fund contributions. Assume when she resumes
work her contributions start at the same level being paid by Ms A at that stage.
Using this scenario Ms B has reduced her working life by 15 percent. (The six years
taken off to raise a family is an average arrived at in Britain. Similar figures are not
available in South Africa). These six years could reduce Ms B's retirement capital by a
dramatic one third.
Here are various permutations of annually compounded interest rates and salary
inflation.
THE BUILD UP OF RETIREMENT CAPITAL:
Scenario
One:
Annual compounded interest:
10%
Salary inflation:
10%
Ms A:
R917 982
Ms B:
R776 754
In this scenario those six years will cost
Ms B R141 128 or 18,1 percent in accumulated retirement capital.
size="2">Scenario Two:
Annual compounded interest:
15%
Salary Inflation:
10%
Ms A:
R2 467 934
Ms B:
R1 953 865
In this scenario those six years will cost
Ms B R514 069 or 26,3 percent in accumulated retirement capital.
As far as annual compounded interest and
salary inflation increases are concerned this is the more probable scenario.
Scenario
Three:
Annual compounded interest:
10%
Salary Inflation:
15%
Ms A:
R2 413 687
Ms B:
R2 197 629
In this scenario those six years will cost
Ms B R216 058 or 9,8 percent in accumulated retirement capital. This is the least likely
scenario.
THE PENSION
Now comes the next hit. Let us again assume the two use their entire retirement capital
to purchase an annuity (monthly pension).
This time we will also bring Mr C into the calculation and assume Mr C has the same
amount of accumulated retirement capital as Ms A in each case. We also assume that all
three are in the same state of health etc.
ANNUITIES (MONTHLY PENSION) RECEIVE
size="2">Scenario One:
Person
Retirement Capital
Annuity
Ms A:
R917 982
R11 011
Ms B:
R776 754
R 9 315
Mr C:
R917 982
R11 756
size="2">Scenario Two:
Person
Retirement Capital
Annuity
Ms A:
R2 467 934
R29 623
Ms B:
R1 953 865
R23 450
Mr C:
R2 467 934
R31 627
Scenario
Three:
Person
Retirement Capital
Annuity
Ms A:
R2 413 687
R28 972
Ms B:
R2 197 629
R26 377
Mr C:
R2 413 687
R30 931
(The annuity figures were supplied by Old Mutual Actuaries and Consultants and were
valid on December 12, 1997. The following assumptions were made in all cases: The
annuities were single life compulsory purchase annuities. Retirement age for all three is
61 next birthday).
Taking the most likely scenario (Scenario Two). The result is that those six years that
Ms B took off to raise a family have cost her dearly. Mr C will receive 34,9 percent more
as a pension than Ms B.
The longer you take off to raise a family the worse the situation.
But even Ms A, who worked for the same number of years as Mr C, now faces the prospect
of an income 6,8 percent less than Mr C. will receive, because she is likely to live
longer than Mr C.
Life assurance companies argue that they are not discriminating against women. The
pension paid out will be exactly the same amount on average as a total amount paid out to
men.
Retirement - the amazing and scary truth is available from bookshops or
directly from Worth Publishing at 011 799 8100.