BUSINESS MAVERICK OP-ED
Keep an emergency fund, particularly if you are a pensioner
If there is anything that the coronavirus pandemic has taught us, it’s that you should always have an emergency fund. But how big it should be might be surprising.
financial advisers have insisted that their clients always have an emergency fund that is fairly quickly available to take account of the unexpected, from having to replace your stove to being out of a job.
Generally, the amount has been a minimum of three months of income.
But in the wake of Covid-19 and the loss of value of the rand, John Anderson, head of research at the country’s biggest pension fund administrator, Alexander Forbes, says this amount is not big enough. He suggests that it should be at least equal to six months of income.
He says many employees have lost their jobs, or been placed on reduced time as a result of the Covid-19 lockdown. If they had a sufficiently sizeable emergency fund, they could probably have seen out the period with more comfort than many people have now experienced.
It has also seen the trade union body Cosatu saying that government should allow workers a 10% access to their retirement funds. If they had an emergency fund this call would not have been necessary.
Then there is also the issue of government allowing employers to hold back contributions to funds under Covid-19. Many employers are taking this up, which means that when those people reach retirement, they will have less saved, unless they find other ways of making it up. This means that the sooner even pre-retirement people build up an emergency fund for when they are in retirement the better it will be for them.
The Cosatu request and the exemption for employers are for employed people – not for pensioners who have to live off what they have.
Pensioners also need emergency funds.
When you change from being an employee to becoming a pensioner your life changes. To begin with, your income is mainly set, but your personal rate of inflation, in many cases, will be higher than the average rates of inflation.
The reasons for your inflation being higher than average inflation include:
- Your medical costs are likely to increase at a far higher rate than average inflation because medical care inflation and medical aid contributions go up faster than average inflation.
- Your medical costs are never fully covered by medical aid schemes, even if you are on a comprehensive scheme. There are all types of limits, from maximums on different claims to a gap you must pay between any savings section, to being allowed to claim again. And this will have an impact on your claims in retirement, as 60% of your total claims will happen when you are retired.
- If you are invested in an investment-linked living annuity you will probably be affected by any ongoing fall in investment market prices.
- Try borrowing money, particularly after you pass the age of 70, and you will pay a higher interest rate, or may not even be allowed to borrow at all. Most banks won’t allow people over the age of 70 to borrow any extra money against any mortgage bond they may hold or to get a new bond.
- While some of your costs may come down, others may go up. For example, travel insurance for people over the age 70 goes up.
- Covid-19 itself has hidden costs. This means a big jump up for pensioners as they need computers or smartphones to stay in touch with their children and grandchildren; and/or wi-fi and a cable network. All of this costs extra money.
Despite the insistence by financial advisers to build up an emergency fund, many people find it difficult.
Anderson says that Alexander Forbes has been trying to get employers to help employees by creating emergency funds for retirement fund members by deducting a little more from their salaries every month.
The best move would be for the government to create an emergency fund for people with tax allowances to encourage savings and structures that limit when money may be withdrawn from them.
Government-aided structures are not unknown. In the United Kingdom the government has created something called a “side-car” savings scheme attached to retirement funds. The side-car is a saving scheme.
Anderson says an example of how this could work would be if total retirement fund contributions of 15% came from you and your employer. Then of this amount, three percentage points could go towards your savings fund.
Anderson says Alexander Forbes already offers a side-car scheme to employers, a few of which have taken it up.
Something for employers and retirement fund members to think about!
What is the best method of setting a target for emergency savings?
- Aim to save enough to cover your basic living needs for a year. It is the amount of money you need to live on that is important.
- You may also be able to earn extra money, such as by renting out a spare room.
- The amount you generate from budgeting correctly, and/or cutting spending; and/or earning more, could come to the six months savings of your monthly income. It is not a matter of replacing all your spending for a year. It is your spending “needs” you have to cover. One thing you should not get rid of is insurance, particularly life assurance in times of a Covid-19 pandemic.
- Don’t use your emergency savings for wants. The money must be kept for things such as losing your job, being put on part-time, having to replace your car or something big in your home. If you spend the money make sure it keeps flowing back in through additional savings.
- You need to discipline yourself. The best way is to set up a stop or debit order to an emergency account. Pay yourself first before you find something else on which to spend your money.
- Don’t worry too much about the return you get. Probably one of the best is a bank money market fund, rather than a unit trust money market fund where costs will be higher. Do not worry about things such as long-term bank deposits where your money is tied up. BM/DM
Bruce Cameron, the semi-retired founding editor of Personal Finance of Independent Newspapers, over a number of weeks will look at the state of pensioners and retirement funds, which will highlight research undertaken by Alexander Forbes on retirement income in South Africa. Cameron and Wouter Fourie are co-authors of the best-selling book, The Ultimate Guide to Retirement in South Africa.