We often hear that South Africans are not saving and investing enough. A report from Genesis Analytics in partnership with the Financial Sector Conduct Authority (FSCA) showed that 90% of South African retirees can’t sustain their standard of living prior to retirement, and two-thirds of members have less than R50,000 in their retirement fund. To minimise the risk of insufficient savings in retirement, the rule of thumb is to save at least 15% of your salary during your working years. This is clearly a daunting task. In this article, I provide a few tips and offer some guidance on how you can re-focus your savings and investments.
A few practical tips to help you save more
It can be challenging to make the necessary adjustments if you are currently saving less than 15% of your salary for your years in retirement. However, delaying saving until you have ‘enough’ money is sure to end in failure. You are far more likely to succeed if you prioritise investing and allocate money to your long-term goals before you find yourself tempted to spend on more pressing needs that life will throw your way.
The key is to make a start as soon as possible, and to continue to build on that once you have a firm foundation in place. Here are a few guidelines to get you started:
· Start saving as soon as possible – even if you can only make small contributions, and gradually increase what you save each year (Rome wasn’t built in a day).
· Adjust the amounts you save annually in line with inflation.
· Keep a record of all the money you spend and compare this to your budget each month – there are a number of apps that can help you keep track of your spending if hoarding receipts is not your thing. This will help you to point out where you need to make adjustments to your spending habits.
· Don’t try and ‘keep up with the Joneses’. For example, keep your cell phone for a year or two longer, drive your car for a few more years, and limit the amount you spend on the fanciest branded items (such as clothing).
· Always preserve your retirement savings when you change jobs (don’t withdraw your retirement savings when you move jobs!).
Over time, these small adjustments and sacrifices you make will gradually and consistently add up. The table below illustrates the exponential gain achieved when saving is extended over a long period. It shows that, if the period of saving is increased to 15 years, you could end up with almost double the amount that you set aside – compound interest is the 8th wonder of the world indeed!
|Amount saved per month (R)||Number of years you save||Total savings set aside (R)||Total amount after savings period including interest (R)||Amount gained in excess of savings set aside (R)||Total accumulated amount as a percentage of total savings set aside|
|1 000||5||60 000||72 945||12 945||122%|
|1 000||10||120 000||180 124||60 124||150%|
|1 000||15||180 000||337 606||157 606||188%|
Assumption: Returns are compounded at 8% per annum.
Factors to consider when reviewing your savings plan
Lifestyles and circumstances change over time, so you should revisit your products and investments on a regular basis to ensure they are still meeting your savings needs. Two important considerations when revisiting your savings are described below.
Saving for retirement is crucial. This can be done via your employer’s retirement fund arrangement, perhaps enhanced by a retirement annuity (RA). If you run your own business, you won’t have an employer scheme, and an RA will therefore be ideal. Also, a tax-free savings account can be a valuable and flexible addition to your retirement income.
Underlying investments in the product
There are a number of choices when it comes to the underlying investments you select. For example, there are unit trusts (more detail provided in the next section) and share portfolios. The key factors to consider in this context are:
· Investment time horizon: For example, if you are saving for retirement that is still many years away, it is sensible to invest in assets with a higher risk-reward profile (for example, equities). This will provide you with exposure to investments that are expected to provide returns in excess of inflation.
· Costs: Compare the costs of different product providers and funds to make sure that you are investing in an arrangement with reasonable costs. For this purpose, use the effective annual cost (EAC) benchmark to compare the costs across product providers. The EAC is a handy ‘cost summary’ including costs associated with investment management, advice and administration. Weigh the costs up against the value you get – for example, the quality of advice and the service you get from the administrator.