One of the most troubling statistics about South Africa is the fact that just 6% of working people are able to retire comfortably, meaning they have savings equivalent to roughly 70% of their pre-retirement salaries.
For the rest, this means one of two things: they will either become wards of the state’s social welfare system or their families (or a combination of both), or they will have to downscale.
The reasons for this sorry predicament have been explored exhaustively. South Africans are poor savers and we are besotted with a consumer culture that urges us to spend now and worry about the future some other time.
Nirdev Desai, head of sales at PSG Wealth, says part of the problem for people in their 20s is that retirement is a distant event. They have other more pressing needs, such as paying for their education, marriage and a house.
“Another problem is the language of retirement. Few people in their 20s are motivated to save for a day when they feel they will be decrepit. So the language of savings has to change. People should start saving in their 20s, but what they are saving for is their future freedom, whether that is a better standard of living, an overseas holiday, a sabbatical and, indeed, retirement.
“Each person’s definition of freedom will be different, but this is a goal that everyone can get behind for the simple reason that no one feels they have achieved the level of freedom they desire.”
The first step in the journey towards freedom is to define exactly what that means. Desai says financial advisors today are really life coaches who help clients explore their life goals and set pathways and milestones to help them achieve those goals.
“Whatever freedom means to you, you have to start saving in your 20s. In SA, the age of mortality for men is 63, and slightly higher older for women. Past that, you have a 50% chance of living to 90. There is some evidence to suggest that those who have adequately saved for retirement also live longer than those who don’t,” he says.
“For many young people, there is a perception that at 65 you’re getting ready to move into an old age home. This is far from the truth. At this age, you should be able to pursue the goals you worked towards all your life, such as travel, and perhaps even starting a new business. Many retired people jump right back into the working world because companies value their experience.”
In a recent newsletter to clients, Desai notes that the old rule of thumb stating that you should save 15% of your salary from the time you start working may not be sufficient. Instead, those who want to retire with a ‘replacement’ salary of 70% of their final salary will have to incrementally increase the amount saved with each salary increase.
Here’s how it works:
Let’s assume your salary jumps to R25 000 a month by the time you are 55. You will have to be saving 40% to be able to retire drawing 70% of your pre-retirement salary. It is simply not feasible to save 40% of your salary at this stage in your working career, for the simple reason that ‘lifestyle creep’ sets in – you have higher monthly expenses and your disposable income is likely nowhere near this.
The solution is to start saving closer to 25% of your salary from the time you start working.
Desai concedes this is tough to sell to someone starting out in their career, but absolutely vital to anyone looking to achieve any degree of freedom.
“People need to start thinking of wealth as intergenerational, something that will be handed on to their children and grandchildren,” says Desai. “Financial planners are a vital part of the discipline of saving: they help you identify your goals and see how savings targets can be met. Rather like going to the gym on your own, without a financial planner, people find it easier to slip back into bad habits when they hit a financial emergency. The financial planner can guide you through the inevitable bumps and cries that come in the course of a lifetime. But this is a lifetime journey and, from our experience, the best way to get there is with a guide at your shoulder.”
Desai points out that having financial freedom means less physical and emotional stress, which allows you to live a longer life. Those who get into the habit of saving early find it no stress at all.
Brought to you by PSG Wealth (PSG Multi-Management, FSP 44306). For more information, visit www.psg.co.za