ADULTING (SORT OF)
Saving for the future (even if it seems far away)
It is never too soon to start saving for retirement. Maverick Life spoke to a financial adviser to find out what a young person’s options are when it comes to funding life after work.
For those who have just entered the workforce, the end of your career might seem too far away to worry about now. Despite how many working years you think you have left, it’s never too soon to start saving for retirement, Jonathan Botha, a certified financial planner and wealth manager at Netto Invest, tells Maverick Life.
“In South Africa we have a savings crisis, meaning that individuals are not saving enough on a monthly basis to meet their retirement goals one day. This is problematic as one ends up reaching retirement age (traditionally at age 65) with a lack of savings to fund the retirement phase, and therefore must rely on family members or government assistance to support themselves in later years,” Botha says.
Across the world, people are also living longer – the World Health Organization predicts that by 2030, one in six people globally will be over the age of 60 – which has exacerbated the savings crisis and made it even more important that individuals start saving for retirement as early as possible, Botha notes.
When to start?
Botha recommends that from their early twenties, individuals should aim to save at least 10% of their gross salary each month into some form of retirement plan.
“If we delay our savings and only start later in life, then one needs to play catch-up,” he says.
“The best approach would be to engage with a financial planning professional who will be able to give you a more accurate indication as to what amount you would need to save on a monthly basis to reach your retirement goal. We all have different goals for retirement and therefore our savings rate will also all be different.
“Starting to save for retirement at age 20 can make a huge difference in the amount of money you have in retirement compared with starting at age 40, even if the monthly savings amount is the same. The longer time horizon allows for more time for the power of compounding to work and generate significant returns over time.”
What are your options?
There are various options available to start saving.
Two popular methods include a retirement annuity and a pension or provident fund, both of which can help one save towards retirement. The main difference, Botha explains, is that pension and provident funds are linked to an individual’s employment, whereas a retirement annuity is not linked to an employer but rather to the individual themselves.
“Therefore anyone working for a company or perhaps self-employed that does not have access to a pension or provident fund would need to open a retirement annuity themselves in order to save for retirement,” says Botha.
“If you are fortunate enough to work for a company that offers a pension or provident fund then you are already on your way to saving for retirement.”
One can have both a pension or provident fund and a retirement annuity simultaneously, but Botha recommends speaking to a financial adviser first to make sure this choice aligns with one’s goals.
Read more in Daily Maverick: If you’ve left retirement planning until very late, here’s what you need to do immediately
Whichever choice one makes, it is a personal one, and it is dependent on everyone’s individual circumstances.
“If an employee doesn’t have access to a pension or provident fund because the employer hasn’t started one then I would strongly suggest the employee open a retirement annuity in their own personal name. Conversely, if an employee has a pension or provident fund and is making good contributions into it and the employer is matching those contributions, then it may not make sense for an employee to open a retirement annuity over and above that,” Botha says.
“From a tax perspective, contributions towards retirement annuities, pension and provident funds all qualify for a tax deduction,” Botha adds.
“Once you receive your refund from SARS you should add that amount to your retirement annuity as a one-off lump-sum payment instead of spending the refund on something else. Then when you do your tax return in the following tax year you will receive a tax refund on your refund (therefore) you end up compounding your refunds over time which will have a hugely positive effect.”
From the very first pay cheque is the best time to start saving for retirement, but regardless of someone’s age, the important thing is that they start.
“Young savers don’t have to look too far to find examples of people that didn’t save appropriately for their retirement. Often we can find examples in our own family, who didn’t make proper provision for their retirement savings. One way to change that cycle is to make sufficient planning for one’s retirement from a young age.” DM/ML