SIMPLE STEPS TO GET STARTED WITH RETIREMENT SAVINGS

Cape Town - While saving for retirement may seem tough at first, it gets easier once you are in the habit. And the good news is you won’t regret it: the decisions you make today will have the greatest impact on the quality of your lifestyle once you retire.
While you may feel you don’t have room in your current budget to accommodate saving for retirement, small financial sacrifices can help. It may be easier to make space for retirement savings than you have anticipated.

Assess your spending habits
Start with a reality check: keep a running total of everything you spend in a given month. Write down every item from your morning coffee to that late-night takeaway. You may find you are spending too much on items you don’t really need.

Consider this: it costs more to have a monthly DSTV subscription than most minimum monthly contributions towards a retirement annuity or a unit trust investment - many financial services companies offer investment minimums of just R500 per month.

Create a budget
Once you have an idea of where your money is going and where you can potentially cut back, draw up a budget. This will help you to understand how much of your income needs to go to fixed expenses and how much is left to play with. Next you need to think about your spending priorities. It’s up to you to place retirement savings near the top of the list.

Ultimately you should look to moving ‘retirement savings’ into the fixed expenses category, making a commitment to investing each month. It’s amazing how quickly you will get used to a little less disposable income.

Calculate how much you need to save each monthAccording to a research carried out by Allan Gray, to save enough to eventually withdraw an income of 75% of your final salary (widely believed to be the amount you need to maintain your lifestyle), you need to have saved twice your annual salary after working for 10 years, five times your annual salary after working for 20 years and 17 times your annual salary after working for 40 years.

Consider how long you have until you retire – this will influence how much you need to save each month to meet your targets. You then need to think about how much risk you can stomach – higher risk investments such as equities tend to deliver higher returns over time but the ride may be bumpy as returns can go up and down. Finally you need to consider whether or not you may need to access your investment before you retire. These elements will inform which products and underlying investments you choose and how aggressive you need to be to achieve your goals.

Do some homework
Take the time to research investment managers and what they offer. This will help you to be confident when you make your decisions, and prevent you from jumping ship at the wrong time and potentially losing money. Successful investing is all about the right partnerships. Objectives need to align, value systems should resonate and trust plays a key role. These criteria should guide your decision when picking an investment manager. If you make the right choice, you could be on the path to a successful long-term relationship.

Automatically increase your future contributions
When you sign up for retirement savings consider an automatic escalation. Research has shown that if you commit in advance to allocating a portion of your future salary increases towards your retirement savings you are less likely to feel you are making a sacrifice. This is because your increased contributions towards your retirement savings will be deducted before you have a chance to enjoy the increased income.

Don’t procrastinate
Each month that you put off saving in favour of spending either increases the amount that you’ll have to save in the remaining months, or pushes out the date at which you’ll reach your goal. Few investors in their 20s realise the drastic impact of only starting to save in their 30s. Putting off saving for 10 years can chop a massive 40% off your end amount.

Acknowledging your future financial needs and making concrete plans to meet these is a discipline that will benefit you and your family enormously.

If putting a plan in place and choosing investments is daunting, an independent financial adviser can help you analyse and adjust your monthly expenditure to help you make space for retirement saving.

Cape Town - If your child is one of the thousands of first-year students enrolled at institutions of higher learning for 2018, you may have found yourself on a parents’ WhatsApp group discussing the tricky question “How much money do we give them?”.

Niel Fourie, the public policy actuary at the Actuarial Society of South Africa, says funding young adults who are not yet earning an income is tricky.

“Students tend to demand the freedom and privileges that come with being adult, but, at the same time, they are not yet in a position to earn their own keep. This means that you are probably still funding them without having direct control over how they spend.”

Fourie says the good news is that, as long as you control the purse strings, you can still teach your children how to spend their money responsibly and how to get into the habit of budgeting and saving. He outlines some of the ways in which parents can use and help minimize the expense of first year student expenditure.

•  Learn to live within your means. 

According to Fourie, teaching young adults to live within their means will require some tough love. “They will run out of money and, since most students have to pay for their food and transport, you will have to come to their rescue when they get it wrong.”

He says that, because generous top-ups simply reward undisciplined spending, allowance top-ups should be made only on request and on presentation of an expenses overview.

Once a fair allowance has been established after a few months, it is time for the next lesson, says Fourie. “You need to teach your child to do more than just record expenses. It is time to learn how to budget.”

•  Drawing up a budget

Money needs to be told where to go, says Fourie. And a budget does exactly that.

While keeping a record of monthly expenses will have taught your child the difference between needs and wants, a budget is different in that it is drawn up at the beginning of the month and allocates money to essential expenses, such as food, transport, laundry and data costs. Anything left over from the monthly allowance can be used for entertainment.

Fourie says that most runaway debt problems are the result of people’s inability to budget.

“Unless you tell your money where to go at the beginning of the month, you will lose control over your expenses, resulting in overdrafts and credit card debt.”

He adds that one of the most important lessons you can teach your child is to never spend money that he or she does not have. The most effective way of ensuring this is by sticking to a budget. “This means that in addition to the expenses overview at the end of every month, your child should also now also present you with a budget for the month ahead.”

• Avoid short-term debt at all costs. 

It is important to understand the difference between short-term debt and long-term debt.

Fourie says that short-term debt includes buying on credit and overdrafts. “Short-term debt is always expensive, as it comes with a high interest rate, and should be avoided.”

On the other hand, long-term debt, such as mortgage bonds, is usually backed by an appreciating asset. Provided you can afford the repayments, this debt is considered “good debt”.

He says students should never be allowed to buy on credit. “You will teach them nothing by allowing this, and they will end up drowning in debt before they have even started working.”

Fourie says the only exception is a student loan, because it allows you to invest in your future. 

“If negotiated properly at a reasonable rate with a reputable institution, a student loan is not necessarily a bad thing.

“Without an understanding of what you are actually spending versus what you can afford, you will likely keep falling into debt,” he says. “Therefore, make sure your young adult does not fall into the debt trap by teaching them proper budgeting skills.”

He adds that a good budget will eventually result in some money being left over at the end of each month. Once this happens, the time is right to encourage your child to save.

•  Learn to save and invest

Fourie says that, as with all good habits, saving requires practice and self-discipline. 

The first step, he says, is to recognise that every little bit counts. Encourage your child to save every month, even if it is only R100. Help your child to set goals that will get him or her into the habit. For example, if your child is keen to go to a music festival later in the year with a group of friends, make it clear that the outing will have to be
self-funded.

Fourie says you could incentivise your child to save by offering to match the monthly saving, provided it is paid into a separate savings account and your portion is used only to fund the savings goal.

“Once the savings habit has been established, you can set bigger goals and even introduce your child to investing.”

Fourie says that teaching young adults to take charge of their finances successfully will require patience and parents to lead by setting a good example. This is not something that can be achieved in one month. 

“Learning to work with money, avoiding debt and eventually saving will help your child to survive financially once they have to stand on their own two feet.”