It’s definitely a challenge to think about your life in 40 years when the day-to-day necessities of life hit you full force every morning you open your eyes.
From saving for that wedding day or the down payment on your first house, you have to cover costs of insurance, healthcare, school fees, and so on.
While some of us have a standard pension fund deduction from work, entering into those schemes might not be enough. Starting to put away money as early as possible will pay off – just check what fin24 had to say about saving for the future:
Make the most of your time
More than half of us only start saving at age 28, instead of when we start working. And there are many people who only start in their thirties, or later, when they hit 40.
The thing is, it’s not just about “catching up’ savings over the last 5/10/15 years that you’ve missed. That’s a tall order in itself. It’s about making up the compounded returns you’ve completely lost out on!
Here’s just a calculated example:
Imagine a saver, Xoliswa, who starts saving for retirement at age 25. Saving R5 000 a month, at an average 6% return per year over time, she’ll have more than R7m by age 60.
Mark starts saving at age 35. He will only have R3.46m at age 60 – less than half what Xoliswa saved. To get anywhere close to Xoliswa’s amount, he’ll need to save R10 000 a month to reach R6.9m in his 25-year investment horizon.
Start even later – at age 45 – and you’re in a much more difficult scenario. Even saving R20 000 a month – four times what Xoliswa started saving at age 25 – won’t even get you to R6m.
How much do you need?
The general rule of thumb in South Africa is that you’ll need to be able to replace 75% of your income to retire comfortably….But increasingly, financial planners are beginning to work on a 90% replacement ratio (especially since medical expenses tend to rise after retirement).
Assume you’re retiring today with a final salary of R40 000 a month (R480 000 a year). To replace 90% of your salary, you would need R10.8m saved to maintain your standard of living (note that this amount also takes account of the 4% rule, which we will discuss in more detail in a later article). Most people will be very lucky if they have three-quarters of that.
Boosting your savings
• The easiest way to try to solve this problem is to save more. Aim to save at least a quarter of your net income. This is not easy and to do so you’re going to need to ruthlessly cut back on your expenses. Along with an automatic debit order into a retirement fund, saving an extra R1 000 a week on a salary of R40 000 a month will make a big difference.
• You’ll also need to be more aggressive when it comes to investing. A generally accepted rule has been to subtract your current age from 100 and have that percentage of your portfolio invested in equities…
• Never cash out. One of the large financial intermediary houses said last year that 93.5% of its members in South Africa “who were paid withdrawal benefits in 2013 opted to take cash rather than preserve their benefits”.
• Finally, there’s also the option of working longer. But you don’t want to be in a situation where you’re forced to do so. Because we’re living longer, it’s not uncommon to continue working (even part-time) into your seventies.
The best thing about this is that when you visit a financial advisor, they will be able to take you through every aspect of using your money wisely.
Say, for instance, you visit the guys at Consequence – they will sit with you, look at your current salary, your goals for the future and the lifestyle you would like to eventually live.
They will then calculate how much you can put away and other aspects of increasing your portfolio, such as suitable investments and so forth.
Better yet, Consequence will give you a consultation for free without any expectations attached.
Get cracking guys and girls, that whole compound interest example shows that time is of the essence.
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