Consistent saving is key for retirement - start today
Johannesburg - The key to ensuring that you have enough money for when you are retired and can no longer work is to start saving today and then to not cash in your pension when you change jobs. Whilst the best time to start saving for retirement is when you land your first job, there is no such thing as leaving it too late. Even if you have failed to start saving for retirement, you can still start today. You just have to contribute more than if you started earlier.
Either way, “You are not alone in the struggle to prepare for retirement,” says Graeme Young, Group Head of Private Equity and M&A at Hollard Insurance. Only one in three adults in South Africa, including those already on pension, have some form of retirement plan, and nearly two thirds of these pensioners still can’t make ends meet each month. In fact, more than 50% of people with pensions will receive less than 20% of their last salary at retirement.
“These scary stats should not put you off or make you give up, but rather help you understand the importance of putting some money aside regularly – investing wisely now, so that your savings will be worth something in retirement, when you need them most,” says Young.
“When it comes to retirement, the three crucial success indicators are your total contributions, the time invested in the market and the investment returns earned. Time is on your side once you start saving and earning interest. The longer you save the more you earn,” says Young, “thanks to the magic of compound interest.”
Compound Interest, is one of the most powerful tools that everyone can use to make sure that even regular, small amounts put away for retirement, grow into something meaningful. Compound interest happens when you reinvest the interest that you earn on savings rather than take it out. This means that you earn interest not only on the amount you have invested, but also on the interest that you earn as well. Compound interest is “interest on interest”.
Fortunately, there are many ways to save and prepare for retirement where you can leverage the power of compound interest.
Savings Accounts are one of the most accessible methods to save for retirement. By simply starting a “retirement fund” in a regular bank savings account from which you can easily deposit or withdraw funds, your money will remain accessible as and when you need it. While certainly easy and convenient and a good place to start, “Using a basic savings account will not, however, earn the appropriate investment returns,” says Young. In addition your contributions are not tax deductible and if you are not disciplined, you could dip into these funds for other needs before retirement.
Savings accounts are very useful to build up your Emergency Fund, which should ideally be equal to 6 months take home pay. Having an emergency fund prevents the need to cash out your pension in times of crises such as retrenchments and job loss, as we saw happen during Covid.
Unit Trusts and Exchange traded funds are pooled investments vehicles that give you exposure to different asset classes, such as property and shares in which you can earn higher returns than savings accounts. They are excellent ways to use the power of compound interest to build up your savings, especially if the funds are left for long periods of time such as 10 or 15 years, or even longer.
Pension and Provident Funds or Retirement Annuities also all allow you to save a certain amount each month, such as 10% of your salary. All three are great tools to building up a fund that, along with all the interest and investment returns earned over the years, is either paid out to you on retirement in a lump sum (certain rules apply) – or, paid out in installments to provide a monthly income in your retirement.
From a savings and interest perspective, “It is better to receive monthly payouts so that the savings remaining in the fund can stay invested and you can continue to earn interest in retirement,” advises Young.
Pension and provident funds are mostly only available to salaried individuals with full-time positions where employers offer these saving and investment structures as benefits. Retirement annuities, on the other hand, “can be opened by any individual, regardless of whether they have a fulltime position or not,” explains Young. Many of these funds also provide benefits that protect retirement savings from tax.
And even once you actually retire, you can continue saving, adding to your retirement capital and extending the period that your pension will keep paying out.
On retirement, Insurance Products, can be purchased to provide a monthly income. Term Annuities, for example, pay out a certain amount each month for a fixed period of time. Living Annuities, on the other hand, will allow you to draw out a certain percentage each month from a larger overall fund, while the remainder continues to earn interest. There is a risk that your funds could run out, however the benefit is that any remaining fund at death, those will be paid to your dependents Life Annuities will pay out a guaranteed amount each month, and unlike living annuities, life annuities do not run out, and pay out each month till you pass away, but you cannot leave anything to your dependents.
“There are simply no alternatives to saving for retirement,” says Young.
“Families today are already under immense financial pressure to provide for their needs with bond payments or rentals, to pay school fees, and cover transport and food. Few will have either the space or additional income to look after retired parents as well. And, with SASSA grants only paying R1 890 a month, total reliance on the government is not an option, especially when one considers that as you age medical expenses increase. The longer people live, unfortunately the more they spend on health.”
“To ensure you are financially taken care of when you reach retirement, you need to start planning in your younger years, because you will need more money than you expect. That said, even if you haven’t started young, it is never too late.”
“There are many products and solutions designed to leverage the power of compound interest, to provide a comfortable retirement. If you start later in life you will need to contribute more each month to reach the same savings goal as someone that started in their twenties.”
“If this is you, I encourage you to contact a banker, insurer, or financial advisor and ask them about how you can start saving for retirement – today,” concludes Young.