The future of work and its effect on millennial retirement savings
- Sebusang lekhuleni
- Jan 19, 2023
- 5 min read
The concept of work has drastically changed over the past few years. The rise of the gig economy and flexible work arrangements have led to a new way of working, which has significant implications for retirement savings. Millennials, in particular, are feeling the impact of these changes. In this article, we explore the future of work and its effect on millennial retirement savings.
Changing times
The traditional career path, where individuals would work for one company for their entire career, has become less common. Instead, people are more likely to have multiple jobs and switch employers frequently. This shift has been driven by several factors, including the rise of the gig economy, technological advancements, and a desire for greater flexibility. Research papers such as the Intuit Global Report projected that 40% of the global workforce would become freelancers by 2020. This projection proved to be true as this number has been revised upwards to 46.5% in 2023. What the research paper could not forecast at the time, was the impending COVID-19 pandemic which would result in mass furloughing of workers in times of suppressed economic activity. This prompted individuals to explore innovative opportunities, giving preference to options that allow them to be mobile and work remotely. On the other hand, companies were redirecting their efforts to reduce costs in efforts to cushion lost income as a result of imposed lockdown measures. While this new way of working has many benefits, it also presents some challenges when it comes to retirement savings. With a burgeoning Gig economy that's here to stay, it pays to probe underneath the surface
The lie that we bought
Bombast rhetoric of better work-life balance and pay is not what it pans out to be for most, considering that one of the primary challenges is that freelancers are generally not offered health or retirement benefits through an employer scheme. As a result, millennials must take the initiative to save for retirement on their own. While it is generally accepted that a psychological leap is required to successfully manage one's own personal finance, many fail to clear the jump. Sadly, inadequate retirement capital savings plague South Africans, with only around 6-8% of the country’s population being able to retire comfortably (with a replacement threshold* of around 60-70%). Naturally, this is an alarming reality.
*A replacement threshold is defined as the ratio of income received at pension as compared to an individual's last income. For instance, an individual who earned R15 000 as their last income with a replacement threshold of 60% will only receive R9 000 as their monthly pension for the rest of their life.
Another challenge is that many millennial freelancers may struggle with inconsistent earnings. The gig economy is characterized by short-term contracts that are linked to projects, which can make it challenging to save for retirement. Without a steady income, it can be difficult to make consistent contributions to a retirement account.
However, it's not all doom and gloom. There are some solutions to these challenges. With an ever-growing pool of those moving away from traditional employment, addressing the retirement savings issue by probing options that are suitable, especially for freelancers and entrepreneurs may be beneficial in preventing some from delaying their decision to resolve a retirement savings plan. Let's look at the following options below
“We know that when people don’t have choices they’re completely comfortable with and understand, they tend to put off that decision.”
— David John, Co-director of the Retirement Savings Project
The types of investment products available to Gig workers
Tax-free Investment Account
S12T was introduced into the Income-tax Act in 2015 to provide South Africans with an incentive to save. Incentives are realised through the tax exemption of income, dividends, and capital gains accrued on the investment, hence the name tax-free. Individuals may invest an amount limited to R33 000 per annum and an amount capped at R500 000 over their lifetime. Should they invest more than R33 000 in any tax year, they will be taxed at 40% of the contribution of more than R33 000 as a penalty. I have presented two scenarios below to further illustrate the mechanics of the investment.
Retirement Annuity
Retirement annuities enjoy the same tax benefits as the TFI, however, there are specific considerations given to restrictions, namely:
The Pension Fund Act governs that once an investment in the Retirement Annuity exceeds R7 000, no savings can be withdrawn by the investor before the age of 55 except in instances where the investor emigrates. Therefore, it is not as liquid as the TFI but then again, the main reason for having a Retirement annuity is to save, well, for retirement.
At retirement, an investor is limited to withdrawing 1/3 of the retirement annuity as a lump sum should the total value of the funds exceed R247 500. The remaining balance of the funds (2/3) is used to buy a living annuity.
I have proposed the retirement annuity as a suitable investment vehicle for freelancers as there are no restrictions in terms of monthly contributions. Individuals may start and stop or reduce monthly contributions (with no penalties) as and when they have the available funds. An added benefit of the Retirement Annuity is the S11F tax deductions that investors receive on 27,5% of their contributions towards their retirement funds. In simple terms, by putting money away for retirement, individuals can pay less tax. This was provided for by the government to incentive its citizens to save and thereby ultimately reduce the burden on state pension funds. Retirement annuities are protected against creditors. If you become bankrupt or are insolvent at the time of your death, the cash in the Retirement Annuity will not form part of your estate and the money will be allocated to your beneficiaries in terms of your last will and testament, instead of to your creditors.
Unit Trusts I have covered Unit Trusts sufficiently in my previous article. Should you require more information about what they are and their benefits, it can be found here.
The abovementioned list of investment products is certainly not exhaustive but can form part of a solid framework for a majority of freelancers who wish to begin their retirement savings journey. However, I perceive that an awareness of the myriad of investment products available is only half of the battle. The remaining half belongs to managing finances in such a manner that they may actually be allocated to these products with consistency and certainty.
One approach is to use a self-directed IRA, which allows individuals to invest in a variety of assets, including stocks, bonds, and real estate. Another option is to use a robo-advisor, which uses algorithms to manage investments automatically. Robo-advisors can be a cost-effective way to invest and can help individuals stay on track with their retirement savings goals.
In addition, some employers are starting to offer retirement benefits to their gig workers. For example, some companies offer retirement plans to their independent contractors. While this is still a relatively new concept, it could become more common in the future.
In conclusion, the future of work has significant implications for millennial retirement savings. With the rise of the gig economy and flexible work arrangements, many millennials may not have access to traditional retirement benefits. However, there are some solutions to these challenges, including self-directed IRAs, robo-advisors, and employer-sponsored retirement plans for gig workers. By taking proactive steps to save for retirement, millennials can ensure they are financially secure in their golden years.
Disclaimer: The information contained in this article is general in nature and not to be misconstrued as financial advice. Before making any decision, I recommend you consult a financial planner to take into account your particular investment objectives, financial situation and individual needs.
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