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Retirement Planning
Thursday, October 1, 2009
Female folly

While women in South Africa have made tremendous strides towards equality in the workplace over the last few years, there remains a large under-provision for retirement savings compared to their male counterparts.

According to Seelan Gobalsamy, MD of Old Mutual Corporate, studies have shown that although women represent about half of the work force, they account for only one-third of South African retirement savings. “This is especially sobering when one considers that women outlive men by about seven years on average and thus need to save more during their working lives.”
“Unfortunately, some women tend to rely on their spouse to provide for them in their old age,” says Gobalsamy. “However, a significant percentage of women in South Africa are single when they retire. Differing life expectancies also mean that women outlive their husbands, and hence their incomes.”
He says it is thus critically important that women take responsibility for their own retirement savings.
“This means women need to become more involved in retirement planning. Understanding one’s employer pension or provident fund is a good place to start. According to Gobalsamy, employer retirement funds generally account for a significant portion of overall retirement savings.
Two recent US studies of participants in large-company plans provide further evidence of the gap in retirement savings that exists between men and women. Vanguard, a unit trust company that also manages retirement plans, reported that in 2007 women’s retirement savings were on average 40% lower than men’s. A more recent study by Hewitt Associates put this gap closer to 44%.
Megan Butler, research actuary at Old Mutual Actuaries and Consultants, says one of the reasons for this gap in retirement savings is because women tend to experience more career interruptions. “This is problematic because women are not saving while they are not working, so they save less overall. They also miss out on promotional salary increases when they are out of the job market.”
Career interruptions also tend to result in failure to preserve retirement savings as employees cash in their retirement savings before reaching retirement age.
Butler says that moving the withdrawal benefit to a preservation pension or provident fund where it can grow without the need to make continued contributions will mean that women are in a much better position at retirement.
Career interruptions also tend to occur when women are younger. These small holes in savings are amplified by the effect of compound interest over the thirty or so years until retirement.
A woman taking two years off between the ages of 30 and 32 will have about 10% less at retirement than a woman without career interruptions. However, the challenge becomes greater if women spend their retirement fund withdrawal benefit when they leave their employer to start a family. Having to start saving again for retirement at age 32, can cut another 35% off a woman’s retirement benefit. In this example, stopping one’s career for two years and spending one’s withdrawal benefit at the same time can cut 42% off of one’s retirement benefit.
Butler says divorced women also need to be aware of the options available to them. In many cases, women may be entitled to a share of their ex-husband’s retirement fund as part of their Settlement Agreement. Prior to 13th September 2007, this divorce benefit could only be claimed when the member of the fund retired, withdrew or died. In many cases, the divorce benefit had been eroded by inflation by this time as it did not earn any investment return in the interim.
Since 13th September 2007, divorced spouses have been able to claim their share immediately. People divorced prior to this date can also claim their money now as opposed to waiting for the member to leave the fund.
This benefit can be sizeable and can compensate women for their career breaks. Women who are entitled to a share of their ex-husband’s retirement fund benefit but who haven’t claimed their money should do so immediately by contacting the administrator of the fund. This will prevent inflation from eroding the benefit.
“Women should seriously consider investing this lump sum in their own pension or provident fund or moving the amount to a preservation pension or provident fund”, concludes Butler.

Copyright © Insurance Times and Investments® Vol:22.10 1st October, 2009
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