Saving vs investing – where South Africans in their 20s and 30s are putting their money

While South African millennials – individuals aged between 18 and 34 – are proving to be better savers than previous generations, they are still failing to invest for the long term.

This is according to new research commissioned by Old Mutual Unit Trusts into the financial behaviour of employed millennials.

The research found that while 69% of millennials have a savings account, only 44% are investing in pension or provident funds.

Khaya Gobodo, MD of Old Mutual Investment Group, said this was problematic as new research by Britannica concludes that the life span for humans is now at least 114 years – which is almost double our expected retirement age.

This coupled with continued failure to invest, could be catastrophic to millennials’ dreams of achieving financial freedom, he said.

“This phenomenon is ascribed to among other things; understanding disease, improved nutrition and technological advancements. In South Africa, there is an existing shortfall in retirement savings, which in itself is a significant opportunity for the financial services industry,” he said.

“From our research, we see that individuals in this generation prefer not to be formally employed and only start putting money away for retirement late in their working lives.

“In addition, millennials tend to save money in formal savings products. Almost 61% of millennials surveyed were saving money in a bank account. However, bank accounts are seldom able to deliver the real growth required to beat inflation, whereas, equity-based investment vehicles can protect and enhance the buying power of your money over the long-term,” he said.

Elize Botha, MD of Old Mutual Unit Trusts, echoed Gobodo’s sentiment, and added that while saving without investing may feel adequate over the shorter to medium term it isn’t sufficient to secure long-term financial security by saving alone.

Even if they are saving quite well over time, millennials who fail to invest effectively are leaving themselves completely exposed to the risk of inflation – the most significant threat to their hard-earned savings, Botha said.

“Reduced long-term investing coupled with time out of the market, leads to a loss of compound interest in savings for retirement,” added Gobodo.

“This is particularly worrying when considering that older generations who are currently retiring still do not have sufficient funds. “Despite many of these people having spent most of their working years with one employer, compounding their retirement savings over 30 – 40 years, there is still a significant shortfall,” he said.

“A generation of millennials, on the other hand, who are not looking to spend much time in one company may be tempted to withdraw retirement savings, for example, on resignation and lose out on the power of compound interest.

“On top of this, the transaction costs and penalties they pay to tax for withdrawing before retirement, further diminish the savings they will be left with post-retirement,” he said.

Read: South Africa’s average salary versus the world

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Saving vs investing – where South Africans in their 20s and 30s are putting their money