Tips to help you save better for retirement – and avoid coming up short
PSG Wealth head of actuarial and product Jan van der Merwe has shared five tips to help minimise the risk of insufficient savings in retirement.
The main takeaways from van der Merwe’s suggestions are to start saving early and save 15% of your salary – compound interest will do the rest.
In partnership with the Financial Sector Conduct Authority (FSCA), a report from Genesis Analytics showed that 90% of South African retirees couldn’t sustain their standard of living before retirement, and two-thirds of members have less than R50,000 in their retirement fund.
“It is clear that South Africans are not saving and investing enough,” said van der Merwe.
Tips on how to save more for retirement
To minimise the risk of insufficient savings in retirement, van der Merwe says the rule of thumb is to save at least 15% of your salary during your working years.
“It can be challenging to make the necessary adjustments if you are saving less than 15% of your salary for your years of retirement, but delaying saving until you have ‘enough’ money is sure to end in failure,” he said.
He added that you are far more likely to succeed if you prioritise investing and allocating money to your long-term goals before you are tempted to spend on more pressing needs.
The tips van der Merwe suggests to help create a good savings foundation for yourself and build towards that 15% marker are:
- Start saving as soon as possible – even if you can only make small contributions, and gradually increase what you save each year.
- Adjust the amounts you save annually in line with inflation.
- Keep a record of all the money you spend and compare this to your monthly budget – several apps can help you keep track of your spending if receipts aren’t for you. This will help you determine where to adjust your spending habits.
- Don’t try and ‘keep up with the Joneses’ – For example, keep your cell phone for a year or two longer, drive your car for a few more years, and limit the amount you spend on the fanciest branded items (such as clothing).
- Always preserve your retirement savings when you change jobs – don’t withdraw your retirement savings when you move jobs.
“Over time, these small adjustments and sacrifices will gradually and consistently add up, thanks to compound interest,” van der Merwe said.
The table below, provided by van der Merwe, illustrates the exponential gain achieved the sooner you start saving. It assumes returns are compounded at 8% per annum.
| Amount saved per month | No. of years | Total savings | Total savings + interest | Amount gained in interest | Total accumulated as a percentage of total savings |
|---|---|---|---|---|---|
| R1 000 | 5 | R60 000 | R72 945 | R12 945 | 112% |
| R1 000 | 10 | R120 000 | R180 124 | R60 124 | 150% |
| R1 000 | 15 | R180 000 | R337 606 | R 157 606 | 188% |
As the table shows, if the saving period is increased to 15 years, you could end up with almost double the amount you set aside.
Van der Merwe also noted the importance of the product type you choose when saving for retirement and the underlying investments in the product.
“Saving for retirement can be done via your employer’s retirement fund arrangement, perhaps enhanced by a retirement annuity (RA), and if you don’t have an employer scheme, then an RA is also ideal,” he said.
Van der Merwe also suggested taking advantage of a tax-free savings account to maximise what you get out for retirement.
There are several choices when it comes to the underlying investments you select. For example, there are unit trusts and share portfolios. The key factors to consider in this context are:
- Investment time horizon – For example, if you are saving for retirement that is still many years away, investing in assets with a higher risk-reward profile, like equities, is sensible. This will expose you to investments expected to provide returns well above inflation.
- Costs – Compare the prices of different product providers and funds to ensure that you invest in an arrangement with reasonable costs. For this purpose, use the effective annual cost (EAC) benchmark to compare the prices across product providers. The EAC is a handy ‘cost summary’ including investment management, advice and administration costs. Weigh the costs up against the value you get.
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