CIARAN RYAN: I’m speaking to Craig Gradidge, executive director and investment and retirement-planning specialist at Gradidge Mahura Investments. Hello Craig.
CRAIG GRADIDGE: Hi, Ciaran. How are you doing?
CIARAN RYAN: Good, thanks. We are going to talk about retirement planning. Every year we get reminded in various reports about how South Africans are so bad at saving. On the plus side, we see that household debt as a ratio of income has been declining nicely over the past decade from about 86% in 2008 to 72% this year. So people are deleveraging, and this is a good thing. However, this tells us we are still hooked on debt, and we are not good at all on saving. Why is this?
CRAIG GRADIDGE: I think that’s an important question. An important reason that we have the retirement challenge that we have is that when people are working they are typically in debt for a long period of time and therefore not saving.
I think it’s important to acknowledge that we are seeing balance sheets being repaired. So our debt level coming down from 86% to 72% is a good thing. Hopefully people have learnt their lessons about the danger of debt, and particularly the dangers of funding consumption with debt. So people deleveraging is a good thing, but a little bit of a two-edged sword in that it’s good for them personally, but it’s not good for the consumer side of the economy which relies on people spending.
So I think from a total perspective it’s good, but from a macro perspective it does pose a few challenges.
CIARAN RYAN: Right. I suppose another question arises as a result of what you’ve just said. Is it ever good to borrow money in order to build up your investments?
CRAIG GRADIDGE: As a rule of thumb, no. But in some instances – and in very few instances. You really have to be careful. You do get opportunities that arise from time to time. Say you have dividend yields of 12% or 13%, and you are borrowing at, say, 10%, it makes sense in that particular instance. But I would say, as a rule of thumb, if you are not a professional investor, I wouldn’t borrow to invest.
CIARAN RYAN: Good. Now, in your career, what are the biggest mistakes you’ve seen people make when it comes to saving and retirement planning?
CRAIG GRADIDGE: I think the single biggest mistake most people make is not harnessing the power of compounding to pay for their retirement. What I mean by that is people start saving late for retirement. They always start too late, and they invariably end up contributing most of the funds for their retirement from their pocket, instead of getting the market to carry that cost.
Let me just explain by way of an example. If you were to invest for 10 years and earn an average of 11% per annum, 55% of the value of your investment comes from your contributions. So, after 10 years, if you have R1 million, R550 000 of that would have been from your contributions. However, if you look over 20 years, only 30% of your investment value actually comes from your investment. The other 70% comes from your returns.
CIARAN RYAN: So the compounding works in your favour.
CRAIG GRADIDGE: Exactly. That’s how you take compounding and make it work for you. You get compounding to pay for your retirement.
CIARAN RYAN: Right.
CRAIG GRADIDGE: The number falls to 20% over 30 years, so 20% of the value of your retirement capital is what you put in. The other 80% is what the market gave you back in the form of returns and growth on returns. So I think that’s the single biggest mistake. Because we start too late, we end up paying for our retirement out of our own pockets.
CIARAN RYAN: Okay. So if one extrapolates this picture of weak savings habits and this love of debt that we have in South Africa – at a national level it’s quite frightening – it means that the state is going to have to care for more people than the 16 million currently on welfare, or people are going to have to work longer. Is there any good news in this picture at all?
CRAIG GRADIDGE: Not in this picture that you’ve just painted. I think the problem is that the bill stays constant – and in fact it grows with inflation – while that income from tax fluctuates with the economic cycle. And, as we’ve seen, a prolonged period of economic weakness can really compromise that arrangement.
However, there is the fact that, in this country, that welfare cheque really does give dignity and subsistence to a large part of the population, who would have little or nothing without it. So, again, it’s one of those two-edged swords. It’s certainly a challenge that government needs to get to grips with.
CIARAN RYAN: People seem to have a bit of an aversion to sitting down with a financial planner, and I guess that’s because they realise that in doing that they are going to have to forego some luxuries in order to plan for the future. What’s your advice to people who have little or no savings at all, and are maybe 10 or 15 years away from retirement?
CRAIG GRADIDGE: I think that fear of facing reality is something that is very human. You see it playing out in other areas of life, whether it’s strained relationships, your personal health, and that messy shed in the backyard that’s just accumulating stuff. As human beings we tend to try and avoid unpleasant interactions and activities, and this plays out in the retirement planning space and in personal finances as well.
I think that someone who is 10 years from retirement is, from our experience, more likely to seek out a professional advisor than someone who is much younger and who thinks, well, look, I’ve got about 25, 30 years to solve this problem. I don’t have to deal with it now.
Older people in the population tend to appreciate that the years do go by very quickly, and I think people need to do their homework on the advisor they choose to walk the retirement journey with: what are their qualifications, experience, skill set, track record – all of that. Over the years I’ve been interviewed by a number of prospective clients who have had a shortlist of three to five advisors. They come prepared with a list of the questions, and they ask difficult questions. Then they go away and they make an informed decision. I think more people should approach things in that way, because the advisor is a key part of tackling the retirement challenge.
CIARAN RYAN: What would you say is the best advice you ever got about saving – yourself?
CRAIG GRADIDGE: I learnt how to budget from my mother, and the one thing she always said is that my investments need to be budgeted for; they need to be part of my budget. Otherwise they just become savings and you just keep dipping into them because you have overstretched your budget. So it was learning the fact that the simple budget is the foundation of good money management, I think, that for me has been the most powerful advice, the best advice I ever got.
CIARAN RYAN: This may be an obvious one, but what’s the best advice you have ever given?
CRAIG GRADIDGE: [Chuckling] Giving advice is what I do and get paid for. I think the advice we give to all our clients is to properly implement the principle of diversification of their portfolios and their balance sheets. So – truly understanding what diversification means, and how we can help them achieve their objectives –I think that’s probably the one piece of advice that I would say is the best advice I would give to our clients.
CIARAN RYAN: Finally, have you any tips or pointers for people listening to this about retirement? Perhaps they’ve got just 15 or 20 years to go for retirement – what should they do?
CRAIG GRADIDGE: I would say that it’s very important to sit down with a qualified and experienced advisor and work through the numbers. Too often the discussion goes to products and product futures and all of that. If you are sitting with an advisor and within the first half an hour to an hour you find yourself talking about product futures, I think you must get up and leave.
CIARAN RYAN: Okay.
CRAIG GRADIDGE: There is so much more to retirement planning and retirement products, and a skilled advisor will be competent with the numbers and with the analysis. I think it’s important to remember that retirement planning is a complex problem which actually cannot be solved. It’s not one of those things that you can solve. It’s a problem that needs to be managed, because you are dealing with so much change; you are dealing with changes in market conditions, the economic environment, in legislation, the politics of the country, tax laws, inflation, your personal circumstances. You have all this change that’s happening, which impacts on your retirement, and you can’t really see a lot of those changes coming. So to help you navigate and work your way through this complexity, having a suitably skilled and experienced advisor may be part of the answer – a successful retirement planner who has actually done that, who is flexible enough to adapt to all these changes without breaking.
CIARAN RYAN: Thank you, Craig. That’s all we’ve got time for.
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