A market commentator recently asked me what I planned to do with the money I’ve saved and invested by being a cheapskate.
I was taken aback.
Surely any self-respecting journalist who amassed a fortune after receiving inflation-related increases and sidestepping several rounds of retrenchments would retire at 35, buy an island and splurge on a lifetime’s supply of Moët?
(Presumably, they would have to be skilled enough not to be prosecuted for insider trading or be first-in first-out on a Ponzi, but since journalism is a noble profession that is incredibly unlikely. The fact that I’m still writing cheapskate articles from the comfort of a newsroom and not from a prison cell probably also provides some insight into my risk appetite. Or my acting skills. You decide.)
Truth be told, the 2.3 of us fortunate enough to be in this position, consider it a very good month when we don’t have to buy the chicory blend.
The uncomfortable reality is that the average, middle class salary-earner will not become a millionaire by saving and investing and actively managing their lifestyle downwards. Yet, it is still a valuable financial principle and can go a long way in providing the necessary buffer when there are financial bumps in the road.
Here are some points to consider:
Things will go wrong
Unforeseen expenses are part of life. I recently had a bit of a health scare. Being young, fit and healthy I only have a hospital plan and of course, specialists and GPs who don’t have the luxury of working from a brightly-lit, air-conditioned hospital theatre charge for it in advance in harde kontant. I couldn’t quite figure out why the plastic surgeon’s receptionist wanted a head and shoulders photograph when I made the appointment. After receiving the bill, the only reasonable conclusion I can come to is that they charge a consultation fee based on how much work the picture suggests necessary.
With unemployment at a 14-year high, and the economy still under pressure, retrenchments are a reality. On Thursday, Sibanye Gold became the latest mining group to announce potential layoffs in a restructuring exercise.
I was quite surprised to learn that there are industries that actually pay a multiple of salary as a bonus. If you work in one of the M industries – media, mining and manufacturing that is – you will know what I mean when I say bonus and retrenchment packages look awfully much alike. During the best financial year of my journalism career (newspaper sales only fell about 10%) we received two weeks’ salary as a bonus. I thoroughly enjoyed the sit-down dinner at McDonald’s.
But the retrenchment story is no longer limited to these industries. Pick n Pay announced in July that it had retrenched 10% of workers, while the JSE said it would cut approximately 14% of its full-time staff.
Your ability to earn an income is your most valuable asset. What would you do if you lost your job?
Returns are expected to be lower going forward
The bull market that followed the financial crisis offered a fantastic return injection to South Africans saving for retirement. Even where fund managers underperformed, investors often still enjoyed stellar returns. It may even have compensated where investors didn’t save enough.
Research conducted by the Old Mutual Investment Group shows that investors in a Balanced Fund with a 60:30:10 exposure to shares, bonds and cash would roughly have earned an after-inflation return of 7.6% over a 56-year period. Over the past three years the fund only outperformed inflation by 2%.
Going forward, it expects the same fund to offer a real return of 3.7%. That is less than half the return investors were used to!
Of course any projections about future performance should be taken with a pinch of salt, but the message is clear: Investors won’t be bailed out by returns in the near future. All else being equal, investors will have to save significantly more to get to the same position.
You will likely live longer than you think
Fifteen years ago, only 1.3% of the South African population was older than 75, according to data from Statistics South Africa. By 2016, this group was 1.7% of the total population. The portion of the South African population older than 80 grew from 0.6% to 0.8% between 2002 and 2016.
Having to support yourself in retirement for 20 or 30 years is a tough ask, even if you have enough money. What if you don’t have enough, like most South Africans?
In a recent interview, Sunel Veldtman, chief executive officer of Foundation Family Wealth, argued that the whole idea of retirement at 60 was outdated.
It is a very important point. Many South Africans won’t have any choice but to work to age 75 or 80, but employers may force them to retire at 60 and they will have to supplement their income in another way.
At the same time, medical needs often greatly exceed people’s ability to pay for healthcare in retirement. I attended a presentation by Alexander Forbes on this topic some time ago (read the article here). While I’m no poster child for healthy living (my eating habits will probably make even the most hardened dietician cry) the figures were so staggering that I immediately started looking at broccoli pictures daily.
It is tough out there. You can’t plan for every eventuality, but putting yourself in a position to weather the storm is what financial planning is all about.
Of course, you could also use your fortunes to buy that island – 0.001% of it. From personal experience I can tell you that chicory tastes much better when you have your feet in the sand.
(Just make sure there is a property somewhere on the island. We don’t want to upset Uncle Mag.)