It is hard to convey to a young person just how quickly the years pass. One moment your idea of fun is a packed nightclub then, almost imperceptibly it becomes a cosy bar where, all importantly, you can get a seat, and then, suddenly, you find yourself in your pyjamas on a Saturday night watching Downtown Abbey on Netflix. Sometimes I honestly feel like I popped out for some milk in my twenties and came back fifteen years later.
However, while time might go as quickly as ever, it is also true that ‘older’ people are, more and more, challenging the perception of what it means to be in the twilight years. Life expectancy and people´s expectations of that life are growing continuously. However, while this is just as true for South Africa as many other parts of the world, the reality is that most South Africans´ financial preparation for their retirement makes for more sombre reading.
This article from The South African newspaper is representative of many grim journalistic evaluations of the situation and is bluntly titled Can the majority of South Africans ever afford to retire? The article states the oft-repeated economic statistic that you should have saved seventeen times your final annual salary in a retirement fund by the time you are sixty if you wish to maintain your standard of living.
An amount that the majority of South Africans will find it very difficult to arrive at.
The same aspirational statistic is cited and, this time, attributed to Jeanette Marais the head of distribution and client services at investment firm Allan Gray in a similarly fatalistically titled Retirement? Just forget about it article from the Mail & Guardian business section, which, despite its title, does at least offer a more achievable breakdown of retirement fund milestones:
After working for 10 years: That saved capital sum should equal two years’ salary. After working for 20 years: You should have saved five times your annual salary. After working for 30 years: You should have saved 10 times your annual salary. After working for 40 years: You should have saved 17 times your annual salary. (Holmes, Thalia. 10/10/2018).
While this breakdown will make the figures appear more achievable to some, for many they will remain aspirational. In this case South Africans whose working lives do not permit them the luxury of a private retirement fund and who possess assets less than R 1 115 400 if single and R 2 230 800 if married are eligible for the older persons´ government grant from the age of sixty years. Further information can be obtained from the government website.
If you do find yourself in a position to provide yourself with a private retirement fund however there is a strong consensus on what the most important piece of advice is from the experts.
The benefits of starting to build your nest egg from your very first pay cheque cannot be overstated and despite this seeming like very obvious advice it is only when you see the long-term accumulative effects of compound interest on your savings that it brings the message home.
The graph and financial example by Ron Lieber in this article for the New York Times provides us with a powerful image of the ‘magic’ of compound interest. In it two retirement funds are depicted: one investor starting at age 22 and saving $5,000 per year at a rate of 6% per annum who will end up with a retirement fund of $1,063,717.57 and another investor who saves the same amount at the same rate but starts ten years later at the age of 32 who will come out with $557,173.80 on retirement at the same age. The difference of $500,000 is remarkable.
If you were to save R 5000 at 6% per annum starting at age 25 you would have over R7 million by the time you were 60. Whereas if you started at 35 you would only arrive at R 3.46million by 60 years of age. To arrive at a similar amount you would have to save R 10 000 per year. It does not take a financial mastermind to see the benefits of starting early.
Another positive reason to start a retirement fund from your first pay cheque is that saving, like a lot of good or bad routines we form, becomes a habit. Starting straight away means that it is just one other thing that you do and after a while you will stop to noticing it. It won’t feel like a hardship and yet all the time your money will be working away for you, compounding its interest and laying a strong base for your future.
The world of retirement funds can be a financial whirlwind capable of confusing the most numerical of minds. There are many different options, some riskier but more rewarding than others, some plainer and steadier. While an in-depth study of the many varied schemes is beyond the remit of this article it is possible to for me to provide an introduction to three of the more standard forms of retirement savings funds.
A company pension fund.
A company pension fund is, as the name implies, a pension fund provided by the company you work for that in most cases is obligatory to opt into. What may be optional is the amount you decide to pay in each month or week. When you do retire you must then convert at least two thirds into an annuity. An annuity is a cash reserve from which you will be paid a fixed sum of money at regular intervals usually until the end of your life. On retirement you are also eligible to take a lump sum of up to one third of your savings which in South Africa can be as much as R 500,000 tax free
A provident fund
A provident fund releases you from the obligation of having to invest two thirds of your retirement fund into an annuity and instead pays you a lump sum when you retire. This option is ideally for someone with a good financial grasp of investing and the discipline not to fritter away all their savings. For spendthrifts it should definitely to be avoided. You should also consider that most lump sum payments will be subject to tax. A basic breakdown would be:
A retirement annuity
A retirement annuity is a retirement fund that is taken out independent of an employer therefore it is usually availed of by the self-employed. You can currently claim 15% in non-pensionable taxes towards this form of retirement plan. Unlike a company pension or a provident fund you cannot cash in a retirement annuity before retirement at the minimum age of 55 and like a pension fund you must use at least two thirds to purchase an annuity on retirement.
If you are committed to creating a strong fund it is worthwhile considering what goals you have for your retirement. These might include what age you see yourself retiring at, how much you will need to spend on your basic living expenses, whether or not you intend to be mortgage free by the time you retire, what you intend to have for discretionary spending, what you intend to leave behind to your next of kin. You may also want to factor in contingency savings in the case of unforeseen financial problems that may arise or, indeed, personal goals that you want to realise such as travel or specific life experiences. People will have different perceptions of what retirement means to them so if you can tailor your pension fund towards your ideal retirement it should fit like a glove when the time comes.
When it comes to retirement funds many people choose to employ the services of financial advisers. While this can be a smart move in getting the most out of your money make sure you are aware of how much you are paying in fees. Any reputable company with an interest in providing a long-term quality service will be clear regarding their costs and if the firm you are with is not it´s a sign you should move your business to a more transparent partner.
It’s a cliché but it’s true. Life goes fast. It may not seem so at times but as David Bowie described it in his song of the same name Time is ‘a sniper in the dark’. It comes creeping. So, if you can, start young and be prepared to give yourself the best financial situation when it arrives. Who knows? They might become the happiest days of your life.
Written for CareerJunction by Mark Dempsey.
