It’s never too late to save

What do you do if you find your­self in your for­ties with­out a re­tire­ment sav­ings plan?

Finweek English Edition - - MONEY - BY JUSTINE OLIVIER ed­i­to­rial@fin­week.co.za

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.

COM­POUND IN­TER­EST

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.

HOW COM­POUND­ING WORKS

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