Nicolette Dirk, finance writer, justmoney.co.za
The Old Mutual Retirement Monitor 2013 shows that 85% of correspondents fear that they will not have money when they retire. A further 42% say that they have no formal retirement provision in place at all while 39% of participants say they will have to work after reaching their retirement age, because they have not saved enough during their lifetime.
According to Michelle du Toit, head of Old Mutual Actuaries and Consultants, there is a severe lack of savings culture among South Africans. The upcoming festive season presents a further challenge for many consumers as the temptation to spend often outweighs the need to save.
“Short-term spending may not seem to cause much damage to your savings pot in the long-run, but when faced with life-changing decisions in the short-term, it can have a major impact on your ability to save effectively,” says Du Toit.
She adds that cash flow is simply not available when you start saving for retirement later in life, so spending your bonus cheque during the festive season, instead of adding it to the retirement savings, is detrimental in the long term.
How much of your bonus should be used on retirement savings?
According to Windall Bekker, partner at REZCO Asset Management, you should be using as much as possible of your bonus for your retirement savings for two reasons:
“There are often tax benefits for additional contributions to your retirement savings and the earlier you can start making contributions to your retirement fund, the greater it will benefit you in later years due to the compounding effect of money,” says Bekker.
He adds that, realistically, people should use as much as possible of their bonus to reduce their unsecured debt, spend a bit on themselves and their families (10%) and then invest the remainder into their retirement fund or other investments.
Du Toit says you should also consider making your 13th cheque pensionable by putting away a certain percentage towards retirement savings before spending it. Employers can also ask staff to put this percentage into their retirement fund.
Which retirement investment options can beat inflation?
Windall says the only way to meet or beat inflation is to have some exposure to the equity markets. But investing into the markets is not risk free as they rise and fall over the short term
“Putting your savings into cash is 100% guaranteed to make you poorer because cash yields less than inflation, especially after tax. The outlook for bonds is not great and investors have a high probability of not matching inflation with a bond fund,” says Bekker.
He adds that ideally an investor would want their retirement savings invested into a multi class balanced fund with low fees that preserves capital when markets fall but still participates when markets rise.
Know your retirement situation
Bekker says many people do not take an interest in their retirement . They do not know what their current replacement ratio is on their funds, who the manager/s of their funds is and which products they are invested into.
“Some people’s investment choice is not optimally relative to their investment objectives and investment time frame. The main reason is that people think someone else is looking after their retirement and they abscond responsibility or their own retirement situation,” says Bekker.
Don’t wait until it’s too late
Du Toit warns that saving for your retirement later in life can pose major financial challenges.
“There aren’t many promotional salary increases at work at this stage, so there are very little additional income streams. Medical inflation is also often not factored into people’s retirement planning. This leaves so many people surprised when their income cannot cover the escalating medical expenses.
A great way to overcome such a pitfall is to continue saving by rechanneling the money. For example, when you are done saving for your children’s education, continue investing by channelling these contributions into your retirement saving,” says Du Toit.
Put as much as possible of your bonus towards your retirement savings. You will end up with a higher pension when you retire and reduce your tax payments.
Make sure that you don’t overspend when buying gifts. Aneesa Razack, head of strategic growth at FNB investment products, advises consumers to allocate an amount they can afford per gift and stick to it.
Don’t wait until it’s too late to start saving for retirement. The later you start, the more your contribution will need to increase for a comfortable retirement.
For more tips on how to spend your bonus click here