It’s never too late to save
What do you do if you find yourself in your forties without a retirement savings plan?
The average 40-year-old without retirement savings should heed the “20% savings rule” to make up for lost time, says PSG Wealth financial adviser Braam Fouché. In fact, 20% might not be enough.
However, many people that age probably have their monthly cash f low tied up in debt and the cost of caring for their families, he says. Should you find yourself in this position, it is vital that you educate yourself and gain control of your finances, adds Fouché.
You can stil l take advantage of compound interest in your forties. However, the younger you are when you start saving, the more you will be able to benefit from compound interest.
“Get rid of the ‘toys’ you bought, the uncontrolled spending, and adjust your lifestyle so your spending falls well within your income,” he advises.
How much you will be able to save depends on your individual goals and self-discipline, he says. While there is a host of retirement vehicles to choose from; you will need to consult a financial adviser in order to ensure that you choose one that suits your long-term goals. Age, current lifestyle and financial health are all factors that play an important role in being able to retire comfortably.
“Having control and insight into your own affairs is vital,” Fouché states. He suggests that those saving up for retirement should diversify assets as well as products. Too many people have experienced unexpected long-term underperformance from various product providers’ savings vehicles, mainly due to excessive charges and thinking that diversifying their strategies will reduce the debilitating effect on their portfolios.
“Read the f ine print and avoid products that charge excessive fees, while applying penalties should you wish to terminate your contract,” adds Fouché.
If you are still in your twenties or thirties, there is still enough time to take benefit from compound interest. Essentially, this is when interest earned on the money saved accrues interest itself.
Says Jeanette Marais, director of distribution and client service at Allan Gray: “Given a long enough period to work, compounding can dramatically multiply the value of your investment so that less of your total investment will be from your contributions and more from investment growth.”
The table uses the example of an investment of R10 000 and annual c ompounding t o il l ust r at e how compounding works. After 20 years, your R10 000 investment will grow to R67 275 – a gain of R57 275. If your returns are not added to the original amount, i.e. if you spend them instead, the total gain from your investment would only be R20 000.