“The only person who will take care of the older person you will someday be – is the younger person you are now.” – Unknown
The most difficult question we normally receive when assisting our clients is: How much should I save towards my retirement? The honest answer is: It depends.
The uncertainty of this response is no help to millions of South Africans, who are not experts in finance and want to know what to do. It leads people to believe that saving for retirement is impossible and discourages them from making informed retirement planning decisions. Many employees are getting the wrong impression from their employers’ retirement plans; these often default employees into saving far too little. Saving for retirement requires self-control since most people would like to save more but lack the willpower. The obvious solution to these challenges is financial education.
Employer retirement savings plan
As employers switch from defined-benefit to defined-contribution plans, employees accept more responsibility for making decisions about how much to save. In a defined benefit fund the employer guarantees you a predetermined pension. In contrasts to that, in a defined contribution environment, your final pension depends on the performance of the underlying assets in your pension fund.
It is easy to save, especially if your employer is one of the many now automatically signing employees up for a retirement plan. Automatic retirement typically start out by setting aside 6 percent of employees’ income with the employer matching those contributions. However, that is way too little. Very few employers have a rate higher than 13 percent, so it is difficult to know what the upper limit is. A recent retirement survey suggests employees could accept saving rates as high as 12 percent.
A major problem with employer retirement plans is that the employees who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. The life cycle savings rate assumes that individuals attempt to balance a lifetime stream of earnings with a lifetime pattern of consumption. Many employees are saving less than the life cycle rate for various reasons. That is because it is difficult to determine the appropriate savings rate, even for someone with finance training.
Save 13 to 15 percent of your salary
If you are looking for a basic rule of thumb, the absolute minimum is 13 percent. This guideline counts retirement contributions coming from both employees and employers. An employee saving 8 percent of her own money reaches the 13 percent goal if her company contributes 5 percent. However, contributing 13 percent to 15 percent in a retirement fund may be unrealistic for employees who have other pressing priorities. When you are young, those include paying down student debt and building up an emergency cash fund. When you are older, a key goal should be paying off your bond, because it makes retirement much less expensive.
How come not many employees contribute above a contribution level determined by their employer? Once employees get used to a particular level of disposable income, they tend to view reductions in that level of income as a loss. It is therefore expected that employees may be unwilling to increase their contributions to a retirement fund, because they do not want to experience a cut in take-home pay.
Base it on how much you earn
How much you earn determines how much you can invest toward your goals. Saving for retirement is likely not the only financial goal you have on your budget. You may be thinking about buying a house, starting a family, travelling the world or any number of other things. All of these goals are competing for a slice of your salary, so setting your priorities and adjusting your savings percentages becomes a highly personal activity.
There is no way to accurately predict your retirement needs since nobody knows what your future holds. However, educated assumptions based on historical data produce fairly clear targets. Aim to save 16% of your annual salary if you are early in your career. If you make R350 000 per year, save R56 000 a year or about R4 666 a month. A tough task? Maybe. If your employer matches your contributions, that R4 666 could be R2 333 a month (or R27 996 a year).
Base it on your gender
Most financial advisers are men, so the financial planning industry defaults to men’s salaries, career paths, preferences and lifespans in making assumptions about the future. However, there is no one-size-fits-all approach to investing for either men or women. Add to that, women are likely to live longer than men. So we cannot use the same retirement planning assumptions for men and women. One area that has received little attention and which can have a big impact on retirement planning is the gender investing gap. A retirement scenario for a man and a woman, both 30 years old with bachelor’s degrees, earning the same and investing 10% of their salaries will have different fund balances at retirement. How much you earn determines how much you can invest toward your goals — and this differs significantly for women and men over their careers.
Save as much as you can
The reality is that putting money away for retirement is not enough. You have to understand and consider the right assumptions when building your retirement plan so that it is specific to your needs. You can take advantage of your employer’s matching contribution. If your employer matches your retirement fund contributions, view that as free money. The change from spender to saver begins with your mind-set, start to view saving as a reward rather than a punishment, this makes your journey to wealth creation much easier. At Inkunzi Wealth Group, one of our primary goals is to hold your hand during your financial journey. We understand that when it comes to your retirement planning, peace of mind is more important than anything else.
Head of Investments
Sphelele joined Inkunzi Wealth Group in 2013 and has 9 years’ experience in the investment management industry, having had previously worked for Allan Gray and Regarding Capital Management. Apart from being an active member of our investment team, Sphelele is also responsible for the management of our business. He holds a BCom degree in Economics from the University of Pretoria.