Talk of ‘retirement’ is a turn-off for most people younger than 45. Saving for something 40 years into the future makes little sense.
A 2018 study by the National Institute on Retirement Security in the US found that 66% of people aged 21 to 32 have little saved for retirement. Comparable data for South Africa is harder to come by, but the pattern is likely to be the same, says Henk Appelo, product development actuary at Liberty.
“I agree that the language of the retirement savings industry is problematic with younger generations,” he says. “If we are trying to encourage savings with the 20s and 30 year olds then we are better advised to avoid using terms like ‘retirement’, and rather address the goals most immediate in their needs and then let this be a start for retirement savings, for example, saving for an overseas holiday, buying a car, getting a university degree.”
It’s also well-known that South Africans are poor savers and that at current rates of savings, the younger generation is going to be working well past retirement age. SA’s savings rate was as high as 23% in 1960 and is now only 16%, according to recent World Bank figures. European savings rates vary from 24% to 30%.
What makes the SA savings story even more troubling is the over use of credit over the last 15 years, resulting in more than 40% of credit-active consumers falling into default on one or more accounts. That makes it even harder to claw their way back to solvency.
There’s no doubt that this working younger generation has it harder than previous generations. Unemployment in the 21 to 32 age category is shockingly high, so job security is uncertain – and competition for the jobs that are available keeps salaries depressed. This means there is little for saving at the end of the month once the bills have been paid.
Something fundamental has changed in the savings culture since those born in the sixties, when jobs were secure and retirement saving was baked into the remuneration package. The pay-out on retirement was defined in advance, no matter what you contributed during your working life.
“The real challenge in SA is to fix the savings problem before people need the money,” says Appelo. “This can only be done early on in life by living within your means. Like our parents always explained to us, spend less than you earn. The difference is what we call savings, and what you do with those savings is up to you.
“Saving is really a way of paying yourself first. You’re not paying towards some vague and uncertain future event. I like to look at savings as a journey, rather than something with a vague end goal – which is why the concept of retirement is so problematic for those of us who are younger. Savings give you options. If you have some money, you have some choices. This is a good situation to find yourself in. In your twenties, your goals are shorter term, such as a holiday or buying a car. In your thirties, marriage and children may be on the cards. Funding the upbringing of the children, and their education, will be a priority. As you enter the forties, retirement definitely starts to loom as something that must be confronted. The problem with starting to save for retirement so late is that the amount you need to put away is huge.”
Less important than choosing a particular savings product is the act of saving itself, adds Appelo.
Liberty’s GateWay Investment Plan gives people exposure to unit trusts, with the flexibility of withdrawing when money is needed, starting with as little as R1 000 a month, which can be scaled up or down as needed.
The real tax benefits kick in with endowment policies and retirement savings products. For those who pay more tax, endowments offer a lower tax rate and money is still available for medium-term goals. What’s very handy is that with this type of product people can invest in assets exposed to the stock market and other types of asset classes to grow during the savings years. For retirement-specific savings, there are products specifically for that purpose with some attractive tax benefits. It is important for savers to understand what products can be used to make sure they hit their goals.
Millennials who save have a crucial advantage over their older peers: time. The longer they save, the more compound interest works in their favour. They are also more risk-hungry and therefore willing to take on more aggressive investment strategies, such as crypto-currencies.
“It’s not so much how people save their money, but that the fact that they save at all. It’s the action you take today to create your future,” says Appelo.
Brought to you by Liberty.