To wait or not to wait

Feel free to reach out to PSG Wealth adviser Dawie Klopper CFP ® directly.

To illustrate the power of compounding Jannie Mouton, founder of PSG, often used the following example: Say there are two people, Elly and Louis, who are of the same age. Both are 35 years old. Elly has always been focused on saving while Louis always believed life is to be enjoyed while you are still young. Elly decided early on to save a portion of her salary whilst Louis said he would start making provision for old age at a later stage.

Louis has been accustomed to a comfortable lifestyle but reaching age 35, being married with two children, he suddenly realised the long-term assets he has accumulated are awfully few.

He found it difficult to change his spending habits in an effort to properly save for retirement, but he had to do something. He did manage to invest a monthly amount in an equity fund based long-term investment plan. The equity fund was expected to deliver a return of inflation (at 5%) plus 7%, despite the volatility of equity returns.

Louis also intended to invest R10 000 a month over the next 30 years. If he continued to invest, his investment would have grown to R35 million over 30 years, which equates to R7.8 million in today’s money. This amount would enable Louis to draw a pension of R32 000 a month keeping up with future inflation.

But back to Elly, the disciplined saver. She managed to save from early on. She studied diligently and landed a decent job, already starting to save R10 000 a month at the age of 25. She invested in an equity fund only. Thinking about investing was difficult in times of geopolitical and financial uncertainty. It was discomforting to consider the risk of a hard-earned salary being destroyed in a market crash, but she knew that the markets always recover. At first it was tough, and Elly had to make a few sacrifices, but Elly stuck it out, continuing to invest every month.

At the age of 35 her circumstances changed, and she decided to stop working, also discontinuing her monthly investment. At that stage, the capital saved amounted to R2.3 million already. Fortunately, she was in a position to leave the investment intact, and according to her adviser’s calculations her investment would amount to R82 million at age 65, if left untouched. In today's money (Elly at 35) it is worth R18.3m and this amount will generate a monthly pension that grows every year with inflation of about R75000.

So, what is happening here? The above example illustrates the power of compounding at work. What is more, with a lot of discipline Elly manages to wait for her investment to work for her.

We all know Warren Buffett is one of the richest people in the world. Granted, he is 92 years old, but 90% of his wealth has been generated after his 65th birthday. At the age of 65 his wealth amounted to US$10 billion, now standing at over US$110 billion. In Buffett’s own words: “Successful Investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time.”