How time, consistency and simplicity grow retirement savings

Question

I started my first job after graduating last year. The company offers group risk cover, but no retirement fund. How much should I invest each month and what products should I use?

Answer

If your company offers group risk benefits, you probably have some or all of the following: life cover, disability cover and income protection. These benefits are important, as they protect you if something goes wrong. But they do not help you retire.

A retirement fund’s job is to replace your income one day when you stop working. If your employer doesn’t provide one, the responsibility shifts entirely to you. That’s not a problem – as long as you act early.

The good news is that starting early gives you an enormous advantage. The even better news is that you don’t need to earn a massive salary to get this right.

A good starting rule for someone in their first job is to aim to invest 15% to 20% of their gross monthly income. If this feels like too much right now, start with 10% and increase it every time you receive a salary increase or bonus.

Here’s why it matters:

Time matters more than returns. Small amounts invested early beat large amount.s invested later. Consistency beats perfection.

Someone who starts investing at 23 will usually outperform someone who starts at 33 – even if the older investor contributes more per month.

If your take-home pay feels tight, remember: your first investment habit matters more than the exact rand amount.

Rather than putting everything into one product, think in terms of three simple investment vehicles.

1. Retirement annuity (10% of your income)

As you do not have a company retirement fund, you should invest 10% of your income in a retirement annuity (RA).

There are a number of benefits:

You can deduct contributions of up to 27.5% of your taxable income (capped annually);

You pay less tax today;

Investments grow tax-free inside the RA; and

It forces long-term discipline.

You can’t access the money easily when it is invested in an RA. Your future self will thank you for money you chose not to spend at 25.

2. Tax-free investment (R1,000 to R3,000 a month)

The next investment product to add is a tax-free investment. You can invest up to R36,000 per year, there is a lifetime contribution limit of R500,000, there is no tax on interest, dividends or capital gains, and money is accessible if needed.

A tax-free investment is ideal for medium- to long-term goals, supplementing retirement income later and giving yourself flexibility without tax leakage.

3. Flexible investment (5% of your income)

Once your RA and tax-free investments are running, any additional savings can go into a discretionary flexible investment like an ETF, unit trust or investment platform account. This bucket is for future home deposits, sabbaticals or career breaks, and opportunities you can’t yet predict.

There are no contribution limits, but returns are taxable. That’s fine – you are investing here for flexibility.

Before increasing your investments aggressively, make sure you have one
to three months’ expenses in a low-risk portfolio. This is your emergency fund and prevents you from raiding long-term investments when life happens – and life will always happen.

The real secret to wealth building isn’t intelligence – it’s automation. Increase your contributions annually, use salary increases, not willpower, and avoid lifestyle inflation. At the start of your career, your greatest asset is time. That means you can afford volatility.

For most young professionals, the key principles are:

• Growth assets (equities) should dominate;
• Short-term market movements are irrelevant; and
• Simplicity beats cleverness.

A broadly diversified balanced or growth-oriented portfolio is usually appropriate. Avoid stock picking, chasing past performance and listening to rumours.
The goal is having investments that compound quietly in the background.

Starting early, investing consistently and keeping things simple will do more for your future than any clever strategy ever could.

The most important step isn’t choosing the perfect product. It’s choosing to start – now. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.