Sowetan

Change from spender to saver for peace of mind at retirement

- Owen S Nkomo

The most difficult question we normally receive when assisting clients is: How much should I save towards my retirement? The honest answer is: It depends.

My response can be confusing, leading people to believe retirement is impossible and discouragi­ng them to save.

“It depends” is no help if you are not an expert in finance and want to know what to do.

Many people are also getting the wrong impression from their employers’ retirement plans, which often default them into saving far too little.

An obvious solution is financial education. But saving for retirement also requires self-control since most employees would like to save more but lack the willpower.

Employer retirement saving plan

As employers switch from definedben­efit 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 based on a formula using your final salary and years of service.

In contrast to that, in a defined contributi­on environmen­t, your final pension depends on how much you and your employer contribute and the performanc­e of the underlying assets in your pension fund.

It is easy to save if your employer is one of the many that automatica­lly signs you up for a retirement fund.

But, typically, these retirement funding plans start out by setting aside 6% of your income with the employer matching those contributi­ons. This is way too little.

Very few employers have a rate higher than 13%, 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%.

Save 13 to 15% of your salary

If you are looking for a basic rule of thumb, the absolute minimum is 13%. This guideline counts retirement contributi­ons coming from both you, as an employee, and your employer.

An employee saving 8% of her own money reaches the 13% goal if her company contribute­s 5%.

However, contributi­ng 13% to 15% to a retirement fund may be unrealisti­c for employees who have other priorities.

When you are young, these priorities 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 so few employees contribute more than the contributi­on level determined by their employer? Once you get used to a particular level of disposable income, you tend to view a reduction in that level of income as a loss, so it is not surprising that few employees are willing to increase their contributi­ons.

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 is 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 a 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-fitsall approach to investing for either men or women. Add to that, women are likely to live longer than men. We cannot use the same retirement planning assumption­s for men and women.

An area that has received little attention and which can have a big impact on retirement planning is the gender-investing gap.

A man and a woman, both 30 years old with bachelor’s degrees, earning the same and investing 10% of their salaries are likely to 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 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, so you must view saving as a reward rather than punishment. It makes your journey to wealth creation much easier and when it comes to your retirement planning, peace of mind is more important than anything else.

 ?? / 123RF ?? When you are older, a key goal should be paying off your bond to make retirement less expensive.
/ 123RF When you are older, a key goal should be paying off your bond to make retirement less expensive.
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