We have all fantasised about what it would be like to have the wealth of the Billionaires that make the Fortune 500 list. It must be an amazing feeling to know that you can afford to buy almost anything your heart desires. The reality is that most of us will have to be content with a nine-to-five job, and a savings plan that will hopefully allow us to stop working at some stage. In reality insurance industry statistics tell us that only 5 in 100 people will be able to retire with enough money to support themselves if they decide tire at 65. The good news is that most people earning a salary will be able to achieve a comfortable retirement, but only if they fine tune their savings strategy as they move up the career ladder.
So if you are starting out on a career path or if you are already pretty far down the track it is important to know that one day you will want to stop working, even if you love what you do. It does not take a degree in mathematics to understand, that in order to get off the work treadmill, you will need to have a fair amount of cash invested. Knowing how and when to save, as your career and income progresses, is therefore critical.
There are a number of reasons why most people don’t save enough. Debt is a big one but things are compounded by the fact that most people don’t save enough and even when they do, they save in the wrong places. So the first rule is that you can’t go it alone you need experts to put you on track and a commitment to a long term view of saving. However before you call an advisor there are some basics that you need to know.
Get familiar with your company pension scheme.
If my own experience is anything to go by, I can safely assume that the large majority of young adults going into their first jobs pay very little attention the “benefits” on offer when they join a company. The human resource department may hand you a pile of papers talking about group life cover, disability, defined contribution plans, retirement annuities, UIF, pensions and provident plans. This volume of information, rivaling War and Peace, usually gets shoved in a drawer with the parking tickets and the band aids. I know it’s not the sexiest reading material in your library but ignoring how your company plan works may end up costing you money. For example, if you buy a home the bank will require you to have life insurance. You may already be paying for cover via your company, by not knowing this, you may go out and sign another policy.
A company savings plan is not enough to retire on.
Another cost of ignorance is assuming that your company savings plan will be sufficient for your retirement. Many factors affect the final payout of the fund , the fact that you are paying a regular amount every month does not guarantee financial independence. The progress of your savings should be checked at least once a year and you should solicit the help of a financial planner to advise you whether you are on track or not. It will probably be “not” so there is a good chance that you will need supplementary savings.
Don’t spend your pension.
This is by far the biggest reason why people retire with insufficient cash in their piggy banks. Lets say for example that you worked for the same company for seven years, and in that period you accumulated R100,000 in savings. If you then decide to leave for greener pastures, and receive this cash, chances are your wardrobe will be looking a lot newer or you will be driving around in a new set of wheels; bad move. Firstly by spending this money you will be charged tax at your marginal rate, and secondly you will have blown 7 years of retirement savings. That is an awful lot of money to try and make up. And its not just the R100,000 you lose out on, but the growth of that money too. Lets say you had not spent the money and reinvested it, ten years later at a growth of say 9% your R100,000 would be worth R245,000.
You need to increase the amount you each year by at least the inflation rate.
In order to give you a clear picture of how inflation affects your pocket we have to look to the future. Lets assume that food costs, on average, rise by 7% per year over the next 10 years and your take home pay rises by 4% per year.
If you are currently spending R2,000 per month on household groceries and your take home income is R10,000 per month – your grocery bill will equal 20% of your take home pay. Ten years from now the same groceries will cost you (At 7% inflation) R4,020. If your salary increases at 4% per year over the same period your take home pay will be about R14,908. This means that your identical household shopping would then represent 27% of your take home pay. So the impact of this is you end up paying more money on basic goods and your standard of living would take a knock.
The above scenario carries huge significance for everyone who is saving money for their own home one day or even for their retirement. If you save R500 per month and only achieve a 4% net return per year; against inflation of 7% per year, you are actually going backwards in terms of buying power.
This is of course the worst case scenario, but what it illustrates is that when you save you have to be aware of the effects of inflation on your money. It is no good saying you can afford to save R1000 per month and then keep your savings at that level into the future. You need to increase your annual savings by at least the prevailing inflation rate to see a decent return on your investment.
Save at least 15% of your salary each month.
Experts recommend that you save at least 15% of your pre tax salary every month, and this needs to be done for at least 25 years to ensure a comfortable retirement.
So now that you know the basic rules the next step is to learn how to save as your career progresses. Most experts will agree that it is never too early to start a savings plan but one has to be careful what one chooses when just starting out on a career. Because young people tend to move around a lot and even go for stints overseas, it is better to stick to flexible investments in the first few years. It’s no good signing up for a ten year endowment and then move to Hawaii a few months later. It could be done, but it is a big responsibility and your income may be erratic. So stick to short term fixed deposits, money market accounts and unit trusts for the first few years of your working life. While investing in property is always a good idea, it can prove to be problematic if you move frequently, buying and selling homes in short time frame can send you to the poor house because of all the costs involved. Even if you rent out your home, the management of tenants from a long distance can be a real headache. So hold off for a while and take this time to save as much as you can towards a deposit.
When you have decided that you are going to stay put for the foreseeable future then you could consider investing in a retirement annuity (RA). An RA is a great way to save if you are on a fixed salary because you get a tax deferment of 15%. In other words if you earn R10,000,00 per month and save 15% of your salary you will only pay tax on R8500.00. You could also now look at investing in a property. There is no doubt that property is an essential component of a good investment strategy.
Once you have been in a career for five years or more there is a good chance that you have changed jobs at least once and often with these job changes, come higher salaries. Do not waste this opportunity to maximise your savings. It may be tempting to notch up your lifestyle but if you can resist getting caught up in the image culture and invest instead, you will be well on your way to wealth.
Once you have been in a career for ten years or more you will in all likelihood benefit from meeting with a financial advisor to work out how much money you should be saving in order to retire comfortably. You aim should be to have sufficient capital invested to afford you an income similar to that of when you were working. Owning our own home should be a priority because ideally, you should aim to be bond free by the age of 40. That way you still have 20 years or 240 pay cheques left from which to save, without being eaten away by a bond repayment. We spend 100,000 hours of our lives working, we earn millions in that time, so it is entirely possible to get wealthy from our chosen career, we just need to formulate and stick to a game plan.