Edition: June / Aug 2017

The sooner, the better

The best time to start saving is when you start earning. The second best time is now. Mathias Sithole, head of public sector and corporate consulting at Liberty Corporate Consultants & Actuaries, proves it.

One of the best known and frequently used quotes on the power of compound interest is attributed to the world-renowned physicist and scientist Albert Einstein. He is believed to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Over the past few years, the economic environment has become increasingly more constraining for both consumers and businesses. Economists are predicting that South Africa is heading towards a recession. The cost of living continues to spiral and consumers are finding it difficult to make ends meet.

It therefore comes as no surprise that an alarming number of South Africans don’t even think about saving, let alone saving or investing money regularly to ensure that they make adequate provision for their retirement.

As difficult as it may seem to put away an amount of money in these tough economic times, the fact is that the longer you postpone it, the tougher it becomes and the less money you will have when you may need it most: in your retirement years when you may have no other source of income.

There’s an interesting proverb which reads: “The best time to plant a tree was 20 years ago. The second best time is now.” Investing for retirement should follow the same philosophy.

People should ideally start saving for retirement as soon as they possibly can. For most, this should be when they initially begin working. However, if you haven’t been saving towards your retirement, it’s never too late to start.

The impact of delaying your retirement savings

Delaying when you begin saving for retirement can have a significant impact on your final retirement benefits. Consider the example of twins, Andy and Mandy. Both of them begin working at the age of 25 and will retire at the age of 65.

Andy is a diligent saver. He immediately starts saving R5 000 at the beginning of every year towards his retirement in 40 years’ time. Assuming he can earn a net investment return of 10% per annum on his investment, this investment would amount to approximately R2,4 million at age 65.

Mandy is less concerned with retirement savings during her early years. She decides only to begin saving at the age of 35, or 10 years after Andy. Assuming that she also contributes R5 000 per year towards her retirement and also earns a net investment return of 10% per annum on her investment, Mandy would end up with retirement savings of approximately R900 000 at age 65. The progression of the savings of Andy and Mandy over the 40 years is shown in the graph.

Mandy’s 10-year delay in the start of her savings journey results in a 60% lower income by age 65 than Andy! Interestingly, if Mandy would like to reach the same savings balance of R2,4 million at age 65, she would have to contribute R13 400 per year from age 35 to age 65. This is more than double Andy’s contributions.

Sithole . . . essential excercise

How to start saving towards retirement

Once you have decided and committed yourself to saving and investing money towards your retirement, it is advisable to consult a financial adviser to guide you along this journey. The adviser will complete a needs analysis with you, identify your objectives and requirements, and advise you on the options available to you in order to achieve your objective.

But the onus is also on the individual. Prior to meeting with your financial advisor, you need to thoroughly do your homework and take stock of your financial situation, your expenses and your savings needs. This will enable the consultation with the financial advisor to assist in determining or clarifying the following:

  • Your current financial circumstances;
  • Your monthly budget and savings capacity;
  • Your current retirement savings;
  • The potential saving vehicles available and their appropriateness to your needs.

Most important: In order to better facilitate the needs analysis, you simply must have an idea of your current monthly budget and your savings capacity.