RETIREMENT SAVINGS - WHY THEY ARE IMPORTANT

The South African government’s old age grant is R1500 per month. Could you live on that?
This amount is less than many of us currently pay towards our cars, or a monthly grocery shop, or a weekend getaway. Unless you think you can survive on this meagre amount, there is no time like the present to start saving for your retirement.
While retirement may seem like a goal too far in the future to affect you if you are under 30, or you may feel like you have missed the boat if you are over 40, we aim to help you answer the question of why you should save for retirement and aims to help you to get started – regardless of your age and life stage.

Is your future a priority?
Between bond or rent, car repayments, schooling and day-to-day survival, there are so many things competing for a piece of the salary pie it is no wonder that saving for retirement falls off the priority list. And once we are done with the monthly expenses, the needs and wants of our current selves take priority over our future selves. We are victims of our instant gratification culture.

According to survey carried out by Sanlam, only 6% of South Africans will be financially independent when they retire; the rest will depend on family or the state pension. This is some scary statistics and really a point to ponder on!

Put yourself in the shoes of your future self
We tend to invest in our bodies and minds, following health and wellness advice, without appreciating the importance of directing some of this spend towards saving. Consider yourself in the future: older, but grateful that you exercised regularly and drank plenty of water and thankful that you took calcium to strengthen your bones and used lotions and potions to slow the ageing process. Imagine how grateful you will be if there is enough cash in your bank account to allow you to maintain your current standard of living when you are too old to work.
It is hard for all of us to have empathy for our ageing selves, but this seems to be particularly challenging for Millennials (i.e. anyone born between 1980 and 2000).

Goldman Sachs notes that tech-savvy Millennials are poised to reshape the global economy; they have a different set of priorities and expectations from previous generations. However, as many are encumbered with student debt, or still living with their parents and putting off marriage and parenthood, a distant goal like saving for retirement is very far off their radar.

If you fit into this age group it’s not all bad news: you are exercising more, eating smarter and smoking less. This is great – but makes it even more important to put saving on to the radar as your healthy ways are likely to promote longevity, meaning you are likely to live longer and have more years to provide for yourself post retirement.

One of the key barriers to saving for retirement is that we find it very difficult to connect with our future selves on a personal level. Our behaviour reflects the fact that we see our future self as a stranger. Psychologists explain that, for people estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now.

How to empathise with your future self
One study found that participants who were exposed to a vision of their future selves allocated more than twice as much money to their retirement savings. Visualisation is a simple technique used by numerous achievers – from sportsmen to politicians. Its proponents claim that by visualising an outcome we see the possibility of achieving it and are more motivated to pursue our goals.
Spend a few minutes trying to visualise what you will look like in the future, and the life you hope to be living, before you make financial decisions.

MAKING PAYMENTS UNDER DEBT REVIEW - WHAT YOU NEED TO KNOW

Cape Town - According to the National Credit Act, consumers can choose one of two ways to repay their debts while in debt review.  An organized consumer, who doesn’t mind the risk and effort it takes, can pay each credit provider themselves according to the Debt Counsellor’s repayment plan.  Alternatively, if the consumer wants convenience and less risk, they can make use of an NCR registered Payment Distribution Agency (PDA).  

Paying the Debt Yourself

Paying your court restructured debt yourself allows you more control but it does expose you to additional risks and a lot more work. If you have struggled to handle payments to all your creditors on time in the past then be cautious of this option.You will have to make lots of different payments to different accounts each month (with associated costs).  You need to make sure each credit provider gets the right amount and keep your own records.

Accounts get different amounts each month according to the plan.  These amounts can change often and you need to pay the right amount into the right account each month.

You need to be an excellent record keeper, as your records may later be needed to resolve disputes and to reconcile accounting differences over time.  Many times, it is best to send copies of all payments to your Debt Counsellor for their records in case you lose yours.  Make backup copies. You carry the risk of making mistakes and have to accept the risk of credit providers holding you accountable for wrong payments.  If they receive the wrong amount or money is put in the wrong account with the wrong reference, it can cause them to start additional legal action due to short payments.

Make sure you pay your debt counsellor their fees each month when you pay your debts or you could end up stranded in the process without anyone to help you.

By handling payments yourself you pay normal banking costs for each payment. Sometimes this can be slightly cheaper than via a PDA.

Paying Via A Payment Distribution Agency

Using a payment service provider will mean you have to pay some fees for their services each month. This is offset by not having to pay lots of bank fees and all the time and effort it saves you. 

Make sure that you are dealing with an NCR registered Payment Distribution Agent. These are the only companies recognized by the National Credit Act as allowed to assist.

Making a single payment to the PDA and letting them handle the rest of the work makes your life easier.

PDAs carry insurance in case they make mistakes.  This allows for some peace of mind.  Also, the fact that the NCR regularly checks up on them helps you feel confident your funds are being cared for.  They are not perfect but can be held accountable for any mistakes.

PDAs keep detailed records of each payment and report to you monthly on your distribution.

AIM TO BECOME DEBT FREE BEFORE RETIREMENT

Cape town:- Most South Africans don't know how much time is left before they retire. They don't have a financial plan in place to settle their debts and start investing. Unfortunately, the majority of income earners will have to seriously downgrade their lifestyles when regular income stops coming in.

according to Liberty financial adviser Phillip Kassel,heavily indebted income earners need to be debt-free by the time they retire. "Most employees earn approximately 480 pay cheques in their working lifetime between the ages of 25 to 65. The average person can expect to live until at least 85. This means they need to use these limited pay cheques to fund a retirement income of at least 240 months. At this rate it is hard enough to meet basic day-to-day expenses in retirement without being saddled with debt repayments – so any successful retirement savings strategy must include a debt repayment plan." says Kassel. Ideally, all debt should be cleared by age 45. This allows enough time to boost your retirement fund contributions instead of paying interest over to the bank. In the worst-case scenario, the aim should be to have no debt by the age of 60. Kassel outlines some of the points he thinks can help achive the goal of becoming debt free before retirement.

DON'T cash in pension savings to pay off debt

While it may be tempting to cash in investments that are growing at 10 to 12% per year to pay off debt with higher interest rates, this might result in the individuals missing out on the power of compound growth on the retirement investments.

Kassel explains, "You may be tempted to cash in R100 000 of your investments to repay short-term debt. If you rather focused on paying off the debt by budgeting and cutting back on your lifestyle, you could probably pay off the debts within five years with a payment of R2 900 per month, or by using your bonuses and tax rebates to pay it off even faster."

"Over five years at an interest rate of 25%, you would spend R174 000 to settle the R100 000 of debt. It takes discipline to start saving R2 900 a month once those debts were paid off. In the meantime, if the R100 000 is growing at 10% a year, it doubles in value every seven years. So, after seven years it is worth R200 000, after 14 years it is worth R400 000 and after 21 years, it is worth R800 000. 

"The same applies to home loans. While cashing in your retirement fund to be mortgage-free means you don’t have a mortgage repayment, you still need retirement funds to pay for your day-to-day expenses. Don’t pay off debt with your nest egg – make the necessary lifestyle changes instead." 

Eliminate short-term debt

Short-term debt could derail retirement planning, so paying these off is highly important.  Draw up a list of all the short-term debts and calculate the date the last debt will be paid off. Those who find that their debts will not be paid in time for retirement, should make significant lifestyle changes now in order to accelerate debt repayments. It is absolutely essential that no further debts are taken during this time.