Prioritise saving for retirement from the day you start working
Sub-editor: business publications When I joined Personal Finance over 16 years ago, I knew next to nothing about finance and investments. Bruce Cameron, the editor at the time, did not see this as counting against me. Personal Finances aims to explain finance in plain language to the lay person. My job, as a sub-editor, was to ensure that articles could be understood by people in the same position.
Personal Finance has done a lot more than provide gainful employment; it has given me an education that I would otherwise not have had, which would have been to my detriment. I’m often asked by people who know where I work to advise on them where to invest – they believe I have some “inside knowledge” that will put them on the path to riches. I have none. What I know is what readers know – a result of the articles I have edited.
Here are the key lessons I’ve learnt and the mistakes I wish I had avoided:
• Make saving for retirement your financial priority from the day you start working. Saving for retirement has been compulsory in all of my jobs, but I assumed that, if I kept contributing at the required rate, I would end up with a secure pension when I retired. Like many others of my generation (I am 49), I had a father who belonged to a defined-benefit (DB) fund. A secure, adequate pension was something I assumed I would get.
Sadly, when I changed jobs, I cashed in my meagre savings, considering them not worth preserving. When I joined Independent Newspapers, its DB fund was closed to new members. However, the implications of belonging to a defined-contribution fund were never explained to me. A year or two before I joined Personal Finance, I started to read the publication. The message started to filter through that (a) a company retirement fund wouldn’t be enough and (b) how much money I accumulated to buy a pension depended on how much I saved before the day I retired. I took out a retirement annuity (RA) through my bank. Those were the days before the Financial Advisory and Intermediary Services Act and unit trust-based RAs. I didn’t understand the implications of being locked into contributing to a policy until the age of 55.
I still have my first RA, although I reduced the premiums to the original contracted amount, and I have taken out a unit trust-based RA, so I can stop or change the premiums at any time without incurring a penalty.
If I had understood the power of compound returns over the long term, I would have started saving much more when I started in my 20s. If I had preserved those meagre savings, and put them in a unit trust fund, they would have grown to a very respectable amount today. The advent of unit trust-based RAs and the tax deduction of up to 27.5 percent present a golden opportunity to save.
• Saving, even small amounts, over the long term is the key to growing wealth. In my mid-20s, I took out an equity unit trust fund. I had no idea what I was investing in, but I knew someone who had done very well out of unit trusts, so I went into the local building society and invested a few hundred rands in the fund on offer. Over the years, I made some ad hoc contributions. A year ago, I found the fund had increased in value by more than 10 times, just from earning returns. If I had understood the power of equity returns, I would have taken out more such investments.
• Avoid debt. I have none. When I bought my current property, I had to take out a mortgage bond for about a third of the price. I realised that my home loan was undermining my ability to build wealth. What I was earning on my investments was effectively being cancelled out by the interest on the bond. I suspended my investments, except mandatory contributions to retirement funds. I cashed in some unit trusts. I paid off the bond in five years. Without debt, I can contribute as much as possible to savings.
Many people are amazed that I don’t have debt and can save. Obviously, not having dependants helps. But it comes down to what’s important to you. I go without DStv and don’t take overseas holidays. I’ve taken to heart the advice of Tyler Durden in the film Fight Club: “The things you own end up owning you.”