André Wentzel, Manager: Retirement Solutions
When saving for long-term goals like a comfortable retirement, there is no better time to start saving than right now. History has shown us that investing over the long term means the ups and downs we see in markets every day average out. It also allows your investments to recover from the impacts of future market crises like the one we’re experiencing now.
To maximise the benefit from the power of compound growth, you should start as early as possible. This will likely mean you can enjoy a larger retirement nest egg, or alternatively you will have to save less in total than if you waited and started later.
Be wary of falling into the trap of thinking that you can start later. Later may come with its own challenges.
Please consult with a financial planner before you take any action regarding your savings and investments
There are three main considerations when making a decision like this:
When setting money aside for emergencies, it’s best to use a product that has very few restrictions like a unit trust, tax-free savings account or even a short-term deposit with a bank, in combination with investment funds that provide stable returns like money market funds. This means you have immediate access and avoid the risk of having your savings negatively affected by markets just as you need access.
However, these investments are not best suited for long-term goals like retirement savings, and you should avoid investing too much of your savings in them.
All investments come with some level of risk, but when you have a long investment term, you can expect a less volatile and more predictable return over the full period even from risky assets like equity and property. This means you can include more of these in your portfolio and achieve higher returns on average.
Having some emergency savings in place should be part of your planning for retirement provision. It allows you to recover more quickly and you are more likely to be able to avoid stopping your retirement contribution or dipping into your saving, but most of your retirement savings should be in assets expected to grow.
Lastly, a regulated retirement vehicle like an RA (retirement annuity) provides the best tax benefits, so to make the most of your retirement savings it’s a great product to use. However, you cannot access any savings from an RA before the age 55 and there are restrictions in terms of how you can use its proceeds.
South Africa has a highly developed investment market that is well regulated. Local markets weathered the 2008/2009 financial crisis better than most others across the world.
Regulations that apply specifically to retirement savings ensure that retirement portfolios follow sound investment principles, like diversification and rules against investing too much in individual investment assets. This all helps to protect your investments as much as is possible, although no investment is entirely risk-free.
When picking a provider to save and invest with, consider also financial strength of the company as this affects their ability to honour their obligations to you. Insurers are compelled to disclose this in financial statements. Select providers that are well known for treating clients fairly and having client interests at heart.
Savings are income that you have earned now, but choose to spend later. Debt is where you buy something now, but pay for it from future income. So in effect, saving vs paying off debt is the difference between setting aside something for your future self vs reducing the burden on your future self.
At the moment, many people may be concerned about their future income and so it would make sense to reduce your debt to avoid running into trouble later on, as you may not be able to afford repayments.
It is useful to make a distinction between good credit and bad credit. This depends on what you buy with credit. If you used a loan to buy a productive asset (that can generate income) like an investment property, this can be considered good credit as it has enabled you to invest more now. Provided that the interest cost on this credit is not too high (e.g. it’s market-related, and you have a good credit rating), then saving towards your retirement instead of clearing debt such as a house loan may be a good move.
However, if you have any outstanding bad credit (e.g. credit card debt), it would make sense to pay this off as soon as you can. This type of credit normally has the highest interest rates, so even if you save, you could end up in a situation where the money you’re setting aside for the future grows slower than the amount you’ll need your future self to pay off, due to your debt.
By investing a lump sum or some of your salary each month, you can grow your money over time so that you can retire comfortably. No matter how much you need to or can afford to save, the most important thing is to stay committed to saving.
If you are retrenched or move jobs, you can maintain your retirement plan by moving it into a preservation fund. Resist the temptation to cash in your savings, as it will be very hard to make up for the value you’ll lose.
If you are retiring soon or are already retired, you need to draw a monthly income from your savings to maintain your lifestyle. You also need to manage your retirement savings to ensure it lasts throughout retirement.