PERSONAL FINANCE

CHANGE OF TACK NEEDED TO BOOST SAVINGS LEVELS

YOUTH Month has just ended and Savings Month is upon us, so I thought it opportune to look at what millennials can do to save.

Many things have been said about millennials that apply to young people of all generations – they’re impulsive, live for the moment, don’t plan for their old age (because they can’t envision it ever arriving), are vulnerable to social and media pressures to be “with it”, are materialistic and brand-conscious, and are loathe to settle down into suburban living because there’s so much out there to experience and do.

Furthermore, few young people of any generation save much. This is for reasons outlined above, but also because they tend to start their careers in relatively low-paying jobs and simply can’t afford to put away much each month.

Two interrelated global trends, however, are having a significant impact on the millennial and younger generations: the march of technology and the evolving world of work.

Work is changing in ways that people of older generations can’t fully grasp. Artificial intelligence and other technologies will make many existing jobs redundant (while opening up boundless opportunities in new fields), and more and more young people are being attracted to, or forced into, what is known as the “gig economy”.

In a recent article for Allan Gray’s News and Insights page on its website, “Planning for retirement in the gig economy”, Tamryn Lamb, the head of retail distribution for Orbis, Allan Gray’s offshore arm, says that in such a world, millennials need to take more responsibility to save for the long term.

She says: “The term ‘gig economy’ has been around for over a decade, but has gained momentum over the last couple of years, as people increasingly choose flexible, taskbased engagements as an alternative to full-time employment.

“This way of making a living is becoming a viable option for many: from highly-trained professionals on long-term contracts, to people offering their time and skills on a temporary, ad hoc basis. Gig economy workers are therefore defined as anyone getting paid for their knowledge or services independently.

“The gig economy is supported – and in some cases, driven – by technology. Digitisation makes it viable for any individual to offer virtually any service to anyone else, even across borders and currencies.

“Digital platforms facilitating this exchange include the likes of

Uber and global freelancing platform Upwork. Often no personal employeremployee contact is involved in the transaction.”

“With great power comes great responsibility” is a phrase well known to Spider-Man fans. Lamb paraphrases it to apply to gig-economy millennials: “With independence comes responsibility.”

The responsibility is to be disciplined about putting aside a portion of your earnings for longterm savings, just as a portion of your earnings in a salaried position would automatically go into a retirement fund.

“The traditional notion of being ‘looked after’ by one’s employer doesn’t apply in this new way of working.

“In the traditional employment model, employers typically take care of individuals’ retirement savings by setting up a retirement fund and ensuring that a portion of everyone’s salary is deducted and paid into the fund before their salary is paid over to them. This is not the case for gig-economy workers. Within this new work style, it’s entirely up to you as your own employer to make provisions for your retirement,” Lamb says.

Retirement annuities (RAs) are the recommended vehicle to use. Originally established for the selfemployed, they offer the same advantages of an employer-based retirement fund, which are that you can deduct your contributions from your taxable income (up to certain limits), and the growth within the investment is tax-free.

RAs offered by unit trust managers are more flexible than contractual RA products offered by life insurance companies, which may impose penalties on you if you stop contributing or want to transfer to another product. Watch out for costs, however, because they’re higher on commercial RAs than on employerbased funds. Also bear in mind that you can’t withdraw money from an RA until you’re 55, and two-thirds of the savings, if more than R250 000, must be used to buy a pension.

A NEW APPROACH

The terms “pension” and “retirement” don’t sit well with millennials for a number of reasons. I’ve said it before and will say it again: to market retirement products to younger generations, the term “retirement” needs to be retired. While the products themselves are worthwhile because of their tax incentives, a change in marketing approach is necessary. These are, essentially, longterm investment products to build wealth in a tax-efficient way.

My suggestion is to replace the word “retirement” with the word “wealth”. So we’d have “wealth funds” and “wealth annuities”. People would save not for retirement per se – although they’ll still need enough to sustain them when they eventually do stop working – but to build their wealth and grow their assets.

Put this way to younger generations, I’m certain they would give more consideration to investing for the long term.

| Freepik