Three biggest roadblocks to savings in SA
Historically, South Africans have been poor savers. However, the onset of the pandemic, coupled with a historical economic downturn has placed the importance of saving under the spotlight. And for some South Africans, this reality hit home.
According to Statistics SA, the household saving rate in South Africa increased to just over 1% in quarter 3 of 2021 from 0.30% in quarter 2. While the increase is significant, South Africans have much ground to cover, particularly in light of their general financial wellness around retirement age.
Many people may find the prospect of saving to be overwhelming, but small actions taken in the present can catalyse big changes in the future. Understanding and appreciating this principle is the key to developing better saving habits.
Below, we discuss 3 roadblocks that we need to navigate around on the road to better saving habits, one of which is not making use of one of the most effective savings tools available to South Africans: tax-efficient savings. Ahead of the approaching tax year-end in February, it may be useful for South Africans to bear the following savings roadblocks in mind:
1. RISC and its implications for life after retirement
As PSG’s Chief Investment Officer, Adriaan Pask mentioned in 2021 quarter two’s edition of Wealth Perspective, at 12%, South Africa has one of the lowest gross replacement rates in the world. This rate refers to the percentage of an individual’s annual income during employment that is replaced by retirement income when they retire. The global gross replacement rate is 70%.
In a practical sense, this means that on average, an individual who makes a monthly income of R30 000 before retirement will only be able to withdraw R3600 a month upon retirement.
Statistics also show that less than 10% of South Africans have made provision to retire comfortably by the age of 65, meaning that they will have to work longer or save more aggressively in order to stay afloat during their retirement years.
RISC is one of the realities of a world in which life expectancy is increasing and people live much longer than the pension system can cater for.
To frame your retirement provision capital requirement at 65, use can the 4% rule – for example if your required monthly income is R30 000, then an annual drawdown of 4% dictates a minimum lumpsum of R9 million, for a sustainable inflation-maintaining income through retirement.
2. Inflation – a savings roadblock that’s important to factor in
The cost of living in a few decades’ time will be much more than what it costs to sustain a comfortable lifestyle today. The effect of inflation on your savings should not be underestimated and needs to be factored in.
Inflation is insidious, occurring in increments over time without really being noticed by the general populace. But a snapshot of what things cost just over a decade ago provides a telling picture.
According to a retail report by Broll, a loaf of white bread cost R5,89 in 2008. Today, it costs around R15,81. This amounts to an increase of 168%. Likewise, compounded by both the effects of inflation and the hikes in ‘sin tax,’ a box of cigarettes costs three times more than it did in 2008.
The help of a financial adviser can make a substantial difference to planning ahead. Financial advisers have the technical expertise, the foresight and the experience to be able to predict how much you will need to retire, taking into account how the national and global economy will change.
3. Fear and greed are savings stumbling blocks
‘Fear and greed’ are terms that you may hear financial advisers use frequently. In a very loose sense, these emotions are two of the most prominent drivers of financial behaviour that affect how people spend and save money. From a broader perspective, these two emotions play a significant, and often irrational role in how financial markets perform around the world.
Investors may be driven to make hasty decisions based on hearsay or a good “stock market tip.” As financial advisers can attest, emotional investing and impulsivity can cost investors dearly. Financial advisers are trained to look at the long-term with “bigger picture” thinking, rather than chasing after “quick wins.” This is particularly true of those who assist individuals in investing their savings towards their retirement – which is ultimately a long-term goal.
Take advantage of tax-free savings
In an initiative that is designed to improve and encourage better savings behaviour, the South African government has created Tax-Free Savings Accounts which enable individuals to save a limited amount of money with no tax obligation. All proceeds from these accounts, which include capital gains, dividends and interest income are tax-free.
There are stipulated caps on the total contributions that can be made into tax-free savings account. Currently, South Africans can invest up to a maximum of R500 000 per lifetime, with the balance of the account being able to exceed that amount due to the accrual of interest.
Tax-free savings accounts are effective savings vehicles that are best positioned as wealth building tools for the long-term as opposed to being “quick fixes.” But as previously mentioned, retirement is a long-term goal. For this reason, tax-free investments of this nature are often considered part of a retirement savings plan and when framed in this context, make attractive options for people looking to build wealth over time.
Nirdev Desai is the Head of Sales at PSG Wealth.