Pro­cras­ti­na­tion is the thief of time

Finweek English Edition - - MONEY -

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

10

8

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.