“I’m too young to save’”

Putting something aside for their old age seems to be the last thing on young South Africans’ minds, who like to opt for an ‘I’m still young – I’ll save later’ philosophy.  Especially our Millennials’ – those born between 1981 to 2000.  Most of them have 2 or 3 jobs – DJ some evenings, Graphic Designer during the day and Photography occasionally. Most of them are extremely tech-savvy.  They dream about retiring at age 35yrs.

And then life happens – they fall in love and babies come and reality sets in, such as provision for education, retirement, estate planning and all those “ugly” truths they tried to avoid.

Therefore, poor savings habits coupled with the high rate of unemployment in South Africa could have an enormously negative effect on the financial future of young South Africans.

The 2013 Old Mutual Savings and Investment Monitor, which surveyed metropolitan working South Africans, showed that 45% of youth respondents – young people between the ages of 18 and 30 – have neither a pension or provident fund nor a retirement annuity in place, while only 13% have an RA.

Instead, the vast majority of respondents prefer to rely on more informal savings vehicles, with 63% saving this way – an increase from 61% the survey recorded last year.

When asked what they were saving for, the responses were strongly skewed towards short-term goals. The allure of their own wheels prompted 34% to save towards a car purchase a car, while 31% were saving for emergencies or a rainy day. Only 26% of the youth respondents indicated that they were saving for retirement.
Even when they are given the opportunity to access a retirement fund, many pass on the opportunity as they feel they would rather start at a later stage when they can more easily afford payments.

Given this backdrop, another alarming finding of the survey was the fact that 45% of the youth sample are planning to support their parents.

Savings should be seen as an “expense”.  When you receive your salary and you pay your rent, electricity, cell phone, etc., savings should be one of those items.

Tips for long-term savings

So what can be done to improve this situation?

* Start early

Contributions made to a long-term savings vehicle or retirement fund early in one’s working life is crucial.  While retirement may seem a long way away to someone in their twenties, it is vital that people begin saving as early as possible.

Basically, thanks to the power of compound interest, the longer your money is invested, the more time it has to grow. Waiting even a few years before starting to save for retirement can have a massive impact on your final retirement savings.

Example:

Thando versus John

Thando, 25, recently started her first job and cannot wait for her first pay cheque; however, she recently read about the many South Africans who cannot afford to retire. So she decided to visit a financial adviser who advised her to start saving R1 000 per month in a tax-efficient investment such as a retirement annuity. While it represents quite a big chunk of her current salary, she is satisfied and feels empowered as she is taking control of her future financial independence. She continues saving R1 000 diligently for the next 10 years. But, due to unforeseen circumstances, she has to stop the monthly contribution. However, the investment continues to grow and generate returns.

John, who graduated with Thando, was also lucky enough to land his first job, right after graduation. He, however, enjoys the smell of new cars and has had four different, fairly expensive cars over the last 10 years and likes wearing expensive clothes. At age 35, and married, he decides to engage the services of a financial adviser, who subsequently advises him to seriously start saving for his retirement as he has not yet made any arrangements for his retirement. Due to his very expensive lifestyle, he can afford to save only R1 000 monthly and decides, based on the advice of his financial adviser, to also take out a retirement annuity. His decision to approach a financial adviser was a clever move and he continued saving his R1 000 over the next 25 years until he eventually retired at age 60.

 

The outcome

The above example is clearly hypothetical and saving R1 000 per month is not enough but will suffice for the purposes of illustration.

Let’s assume that both Thando and John’s investment grew on average at 10% per year. Who do you think had the largest sum of money at age 60? You might be surprised to learn that it is in fact Thando, who contributed only R120 000 in total (R1 000 X 12 months X 10 years), who had the larger sum of money and not John, who contributed almost three times more: R300 000 (R1 000 X 12 months X 25 years). The graph below indicates how Thando’s investment (blue line) grew in comparison to John’s investment (orange line).

How is this possible?

The answer lies in compound interest. Albert Einstein apparently referred to this phenomenon as the eighth wonder of the world. Those who understand it, earn it (like Thando), and those who do not understand it, pay it.

The beauty of compound interest is that it works for you. For instance, if you invest R1 000 in year one and are able to realise a return of 10% in that year, after the first year your investment will be worth R1 100 (R1 000 plus the R100). During year two, you will not only earn a return on the original R1 000, but also on the R100 that you made during year one.

The longer the period of time compound interest has to work its magic, the better, so the sooner you start saving, the better. Therefore, the mere fact that Thando started saving so much earlier allowed her investment returns to start working for her and by year seven, the return she was receiving was already matching her contribution, i.e. R1 000. By the time she stopped contributing to her retirement annuity, her investment was delivering a return of R1 698.71 per month (exceeding the monthly contribution), and this is the reason why John could never catch up with her.

Therefore, at the age of 60 Thando had an amount of R2 478 228.93 saved, while John had only R1 338 890.35 saved.
* Take a long, hard look at your current financial position

Consider all your expenses and then classify those according to wants (optional, nice-to-have things) and needs (essential items).

The nice-to-haves all, in some way or another, take potential funds away from your long-term savings – so go through the list and select five or six optional expenses that you can cut out. Then put this money into a long-term savings vehicle instead

* Set yourself specific goals

A long-term savings plan must be based on realistic but specific long-term savings goals.  Without these goals, you will struggle to save, as you will be inclined to simply spend all the available income at your disposal.

Do not think of long-term savings as an optional expense. Whatever you earn, your long-term savings goals should be a priority. It will be much harder to save later on in life when you really need the money.”


Source:  Verena Masencamp CAIB(SA); BA (SA)

Verena Masencamp

Verena is a Financial Advisor for one of South Africa's leading long term insurance companies. She studied at Milpark School of Financial Planning & Insurance and offers free financial analysis: looking at your current financial situation as well as requirements and wishes for future and retirement needs and ensure that you are adequately covered and prepared for the unprepared events in your life.

Verena holds a Bachelors degree and is Certified Associate of the Institute of Bankers of South Africa.

Contact number: +27 12 470 0741
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