Procrastination is the thief of time
When I look at today’s savings trends, I get the idea that South Africans take the ‘there will always be something more important than saving’ approach. Many feel that they have more than enough time to save before retirement. Besides, you live for the moment. The new bicycle, hi-f i system, golf clubs or coat you have been eyeing will certainly bring you more joy in this particular moment, right?
I believe that this is the main reason that SA’s personal savings numbers (as a percentage of personal income) have dropped from a level of around 11% in the 1970s, to around 5% in the 1990s, to the current -2% level. Our country’s spending habits have increased as interest rates dropped lower and lower.
A 30-year-old recently sent me an email asking me how much he would have to save each month for the next 30 years to provide an income of approximately R15 000 per month in today’s terms, after retirement. There is a short and a long answer to this question, and I will discuss both. The short answer is to start saving immediately, regardless of the amount. Just start! Studies have shown that the earlier you start saving, the more comfortable your retirement will be.
PERSONAL SAVINGS AS A PERCENTAGE OF PERSONAL INCOME 13 12
6 The long answer will take several assumptions into consideration (based mostly on government goals and historical data – none of which bear any guarantees for future performance).
Firstly, the government made it clear that it would like to keep inflation levels at around 4%-6%. At current risk-free return levels of 5.7%, you would have to save roughly R3.6m in today’s terms to provide you with an income of R15 000 per month. Working on the assumption that inf lation will remain steady at 6% for the next 30 years, and that risk-free returns will remain at 5.7%, it would mean that today’s R3.6m will equal approximately R21.7m in 30 years’ time.
If we use an income tax rate of 30% and take a look at the different asset classes, we will see that shares have still delivered the best returns since 1986 (inf lation +8%). Properties came in second (inf lation +5%) and bonds came third (inf lation +2%), while the money market underperformed inflation by -1% per year.
If the next 30 years’ average returns follow in the footsteps of the past almost 30-year average (inflation plus) and this investor braved the higher risk of shares, he should be saving an average of R3 950 per month for the next 30 years to reach his goal. If he prefers the comfort of a more diversified portfolio (60% shares, 5% property shares and 35% bonds), he would have to save R6 600 per month. Although this is an extra R2 650 to put away each month, it still beats the R26 000 per month he would have to invest in the money market to reach his goal.
Although these numbers are purely illustrative and based mainly on historical data, it clearly shows us the importance of starting to save as early as possible. If you will not be using any of your capital or withdrawing an income for more than 10 years, shares still remain my investment of choice for this type of investor.