Did you know?
According to the Sapir-Whorf hypothesis (a hypothesis that suggests that the structure of a language largely shapes the world view of the speakers of that language) parallels may be drawn between language structure and the financial behaviour of the first-language speakers of that language.
According to a study conducted by Keith Chen at Yale University in the United States in 2013, the speakers of languages with strong future tense forms save considerably less money for the future than speakers of languages where the future tense is not really used. Chen compared the savings rate of people in 76 countries with the structure of the languages spoken in those countries, and came to the conclusion that speakers of languages with weak future tenses contribute twice as much to saving vehicles than speakers of languages with clear time indications of the future tense.
In practical terms: English is regarded as a language with a strong future tense form because of the use of constructions such as “will” and “going to”, whereas German is seen as a language with a weak future tense form.
The reason for this is that speakers who are used to referring to the future as something that is far off, are less inclined to save than speakers who are used to viewing the future as nearer in their language usage.
According to a study on personal finances that was conducted among working people in the United Kingdom last year, 15% of the respondents were not sure if they would have enough money for retirement. Further studies show that people across the world are ignorant about their personal financial well-being, and actual trends show that this percentage is much higher.
Regarding statistics on people’s behaviour concerning saving for the future, a study conducted in Germany, the United Kingdom and France, respectively, showed that an average of 26% of respondents were not saving for retirement but that they had saved in the past and were still planning to save in the future. 10% of the German respondents and 5% of those in the United Kingdom indicated that they were not saving for retirement at all and also did not intend doing so.
Saving for retirement therefore seems to be a world-wide problem.
Looking at research on South Africans’ saving behaviour, however, the picture is much bleaker than the international trends referred to above.
According to a 2018 report by 10X Investments on the financial realities of retirement among South Africans, 41% of the more than one million respondents indicated that they had not made any provision for retirement. Fewer than 35% of black South Africans indicated that they did have a pension or provident fund, while fewer than 20% of black South Africans had a retirement annuity.
What is even more alarming is that 40% of South African women across all races indicated that they did not have any form of savings or investment. Furthermore, the results of a survey conducted by Just Retirement South Africa show that only 50% of the married men taking part in the survey considered it important to leave an inheritance to their spouses.
Research by Netwerk24’s Muntslim section and Old Mutual, respectively, found that most South Africans are totally ignorant concerning the general principles of financial planning and the management and planning of their own savings. Old Mutual’s 2018 report analysing the financial behaviour of working South Africans in the major metros showed that respondents were saving an average of 14% of their income, but that these savings were not being applied to link up with long-term objectives such as life and disability cover and pension benefits.
This reality is a far cry from the advice given by experts on financial planning for retirement:
When do you start saving for retirement?
Experts agree that you should begin saving for your pension when you get your first permanent appointment, which is at the age of 25 on average. In the above-mentioned report by 10X Investments only 22% of the respondents indicated that they started saving for retirement at the beginning of their careers, while 46% of the respondents indicated that they started saving for retirement only after they had become established and started a family.
If you have not yet started saving, don’t think it is too late. The second best time to start saving is nów. The earlier you begin, the less you have to save every month in order to enjoy the benefits of composite interest and investment growth.
How much do I have to save to have enough for retirement?
This question should be answered by first looking at South Africans’ life expectancy. With ongoing development in the medical industry, the average person can expect to live longer than a few years ago. This means that you have to save for at least 20 to 25 years if you intend retiring at 65.
Although opinions in this regard differ, the general rule of thumb is between 70% and 80% of your current salary, provided you have no more debt. Some financial planners even increase this percentage to 90% of your current income, because medical costs rise considerably as one gets older. The average South African spends roughly R28 000 on medical expenses every year, and frail care costs stand at about R190 000 per annum, without even including medical inflation. Medical inflation for 2018 was 8%, much higher than the current consumer price inflation (CPI) rate.
A study in the US in 2018 showed that 50% of respondents knew full well that they would not have enough money if they were to require long-term care for medical reasons during retirement, and for South Africa the picture does not look much better either.
It also is important to note that saving for retirement is not an exact science. Instead of trying to find an exact figure, it is better to use the spectrum of age as a target.
If you start saving at the age of 25, it will be sufficient if you save 15% of your gross monthly income. If you start saving at 30, you should save 20% of your gross monthly income, and if you start saving only at 40, you will have to save about 42% of your monthly income before deductions. From this it is clear that the earlier you start, the less you have to save monthly.
The asset manager Allan Gray advises clients to also plan for lifestyle inflation. The guidelines given usually only take into account inflation that is linked to the general CPI. If your lifestyle inflation exceeds the CPI, you have to bear this in mind when planning for retirement.
What if I started saving late?
When you start saving late, what is important is not only to catch up on your monthly savings, but also that you are missing out on the benefits of composite interest.
The following example illustrates the effect of composite interest and time (without taking inflation into account):
If you start saving R5 000 per month at the age of 25, with a 6% rate of return, you will have saved more than R7 million when you turn 60. If you start saving at the age of 35, you will have saved only R3,46 million when you turn 60. If you also want to have R7 million at the age of 60 (having started at 35 years of age), you will have to save about R10 000 per month over 25 years.
OK, you started saving much too late and cannot now afford saving large monthly amounts for pension, what now?
According to experts there are several ways to augment your pension: you may invest in a tax-free savings account or a second property or on the stock exchange, or you could even collect valuable works of art.
If you are near retirement and you realise that you have not saved enough, you could do the following:
- Never have the money you invested in an annuity or pension fund paid out, because you will miss out on the benefits of composite interest and tax benefits.
- If you still cannot save enough every month, you should perhaps augment your retirement contributions with a 13th cheque or look out for an alternative source of income.
According to the above-mentioned study conducted by Netwerk24’s Muntslim section in 2017, 38% of the respondents had only a vague idea of their own retirement planning, and 7% of the respondents indicated that their retirement planning was lacking woefully and that they were feeling helpless. These statistics are in line with global tendencies referred to above.
You don’t have to feel helpless. Knowledge is power. Take control of your retirement planning today and start thinking of plans how you can start saving or augmenting your current savings. Also remember that you don’t have to do this all on your own: there are qualified persons, such as those at Solidarity Financial Services, who can give you guidance on your investment portfolio – just be sure to contact them today at admin@sfdienste or 0861 101 005.