Q: My friends say I should be saving for my old age rather than blowing my salary on my shoe collection. Can’t I wait until I’m older to worry about retirement?
A: Sadly, no. Statistics suggest that only three to six percent of South Africans are financially independent at the usual retirement age of 65 — an alarming 47 percent rely on family for support.
The only way to avoid being financially dependent on family or the state when we’re old is to save from the moment we start our first job. Here’s why: based on an assumed growth rate of 15 percent, if you saved R100 per month from the age of 25, you would have R500 000 by the age of 55; if you started saving at age 35, you would need to save R406 per month to reach the R500 000 mark, and if you started saving at 45, you would need to save R2 052 per month.
In your 20s
You have a long-term investment time horizon (the time the funds can remain invested until you retire). Determine how much you can save every month (generally a little more than you think you can) and get advice from a financial planner on how to invest this money in a general equity unit trust.
Be diligent about increasing that amount every time your salary increases. It’s very important that if you leave a company and have accumulated pension or provident funds, that you don’t take these funds as cash but reinvest them in another suitable retirement fund.
In your 30s
You’re aware that you should be saving, but at this stage the commitments on your income have increased (house, car, kids’ education). Once you have determined what you can save, split this amount two ways: invest a portion in a “low risk” unit trust — a fund where can you access the money in an emergency (get professional advice on selecting an appropriate fund) and invest the balance in a retirement annuity fund.
Again, seek professional advice to determine a tax efficient contribution, as well as an appropriate investment fund within the retirement annuity fund. If you resign from your job and have accumulated pension or provident funds, never take these funds as cash; always reinvest in another suitable retirement fund.
In your 40s and beyond…
By now you really do need to sit down with a financial professional and understand what capital lump sum you need to accumulate at retirement to be able to provide you with a monthly retirement income. You need to know what you have to save each month to achieve this goal.
You may need to start adjusting your current standard of living to be able to provide either the required amount or as close to it as
possible. Your plan now needs to become a reality. And again, if you leave your job and have accumulated pension or provident funds, it is wise to re-invest. Don’t blow your funds on a new plasma screen TV!
Yes, it’s difficult to imagine 65 when you’ve just celebrated your 25th birthday, but here’s a thought to get you motivated: imagine swapping your current weekly sushi habit for pet food! There are many, many tragic tales of elderly people fallen on hard times. Don’t be one of them simply because you can’t get your head around the idea of old age.
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