Am I saving blindly, or do I know where I’m going?

Feel free to reach out to PSG Wealth Manager Tian Ebersohn directly.

I always make a point of asking new clients if they know whether their monthly contributions towards their investments will provide them with financial security at their chosen retirement age. The answers vary.

Most people say they do save but they don’t know if they are saving enough or perhaps too little. Some investors save in retirement products while others prefer discretionary investments, or a combination of both. Sometimes I come across people who mistakenly believe their monthly contributions towards risk products such as life and disability cover are providing for their retirement.

Saving versus saving ‘purposefully’

It’s one thing to set money aside every month, and that’s fine. However, it is important to save in a calculated way, annually adjusting the calculations to reflect real numbers. In this context, saving purposefully or in a calculated way means putting money away every month towards reaching a specific goal. The goal is to know exactly how much you will be able to retire on one day – even if the retirement date is 20 or even 30 years away. The difference between saving and saving purposefully is hoping that you are saving enough in the first instance, and knowing that you are saving enough in the second instance.

Time on your side

If investors have time on their side, one of two scenarios is likely to occur. On the one hand, there are investors who recognise the value of compound growth over time and use it to their advantage. On the other hand, there are investors who believe it’s okay to start later, as there is ‘plenty’ of time. What some people don’t realise is that they are actually in a critical phase of their lives.

Practical example

I have made seven projections to illustrate the power of compounding and purposeful saving.

The common variables are as follows:

• All the investors are 25 years old.
• Their retirement age is 65 years.
• The income projection term is from age 65 to age 90.
• The goal is to retire at age 65 with R50 000 p.m. (after tax, 2024 monetary value).
• Inflation remains 5% p.a. over the term.
• The investment return is kept at 4% p.a. above inflation over the term.

Conclusion

In projection 1, the investor has 40 years left to save for retirement. The R7 750 he saves every month likely constitutes a large portion of his starting salary, but he is determined to keep saving this amount. As the time passes and his salary increases, the monthly savings component gradually diminishes as a percentage of his salary. Over the 40 years to retirement, it is evident that he has saved the smallest portion of his own capital (R3 720 000). It is important to note that the capital only constitutes the contributions over the investment term, not including any growth over this period.

It is evident that the monthly obligation is not only increasing with every projection, but every investor has to invest more of their own capital too.

Only starting to save at the age of 35 (projection 3) requires saving about 70% more than the investor in projection 1 every month. Over the term to retirement, approximately 28% more of the investor’s own capital must be contributed to reach the same goal.

Only starting to save at age 45 means there are only 20 years left to retirement. This individual has to save considerably more than the person in projection 1. Over the term, he needs to save about 60% more of his own capital to reach his goal.

Unfortunately, investors often don’t have funds available to invest for retirement due to circumstances. There are numerous reasons why retirement provision is not always a top priority. Factors like the economy, job opportunities, health and costs of living are making it difficult, if not impossible, to save.

I feel it is important to try and illustrate how powerful compounding is if utilised from an early stage. You don’t always have to start investing thousands of rands, because even a small amount invested monthly and sustained over time, may grow into a substantial amount.

Compound growth and purposeful saving are powerful tools that are available for investors to utilise. This may make the difference between a comfortable and a stressful retirement.

Feel free to speak to us about retirement provision, then we’ll calculate how much you need to save to reach your specific goals. The earlier you start, the better.