Publications
Partners
The average 40-year-old without retirement savings should heed the “20% savings rule” to make up for lost time, says PSG Wealth financial adviser Braam Fouché.
In fact, 20% might not be enough.
However, many people that age probably have their monthly cash flow tied up in debt and the cost of caring for their families, he says. Should you find yourself in this position, it is vital that you educate yourself and gain control of your finances, adds Fouché.
You can still take advantage of compound interest in your forties. However, the younger you are when you start saving, the more you will be able to benefit from compound interest.
“Get rid of the ‘toys’ you bought, the uncontrolled spending, and adjust your lifestyle so your spending falls well within your income,” he advises.
How much you will be able to save depends on your individual goals and self-discipline, he says. While there is a host of retirement vehicles to choose from; you will need to consult a financial adviser in order to ensure that you choose one that suits your long-term goals.
Age, current lifestyle and financial health are all factors that play an important role in being able to retire comfortably.
“Having control and insight into your own affairs is vital,” Fouché states.
He suggests that those saving up for retirement should diversify assets as well as products. Too many people have experienced unexpected long-term underperformance from various product providers’ savings vehicles, mainly due to excessive charges and thinking that diversifying their strategies will reduce the debilitating effect on their portfolios.
“Read the fine print and avoid products that charge excessive fees, while applying penalties should you wish to terminate your contract,” adds Fouché.
Compound interest
If you are still in your twenties or thirties, there is still enough time to take benefit from compound interest. Essentially, this is when interest earned on the money saved accrues interest itself.
Says Jeanette Marais, director of distribution and client service at Allan Gray: “Given a long enough period to work, compounding can dramatically multiply the value of your investment so that less of your total investment will be from your contributions and more from investment growth.”
The table uses the example of an investment of R10 000 and annual compounding to illustrate how compounding works. After 20 years, your R10 000 investment will grow to R67 275 – a gain of R57 275. If your returns are not added to the original amount, i.e. if you spend them instead, the total gain from your investment would only be R20 000.
Retirement Action Plan
Jeanette Marais, director of distribution and client service at Allan Gray, gives some tips to those who are in their forties and have yet to save for retirement:
1. START IMMEDIATELY
Each month you put off saving, you will have to save more and may even have to retire later. The sooner you start saving, the longer you will have to benefit from compound interest.
2. SAVE MORE
The rule of thumb for retiring financially independent is that you will need a capital sum of about 17 times your final annual pre-tax income.
This will give you an income equal to about 70% of your income at a retirement age of 65 (if you plan to draw 4% from a living annuity and increase your income each year with inflation).
To achieve this you would have to save 17% of your salary from age 25. This is based on the assumption that inflation over the period averages 6%, your salary increases average 7%, and your investments achieve a real (i.e. above inflation) return of 5.5%.
If you start at 40, the picture is rather different. To achieve the same level of income (70% of final salary), you will need to save approximately 39% of your salary, or delay retiring to give you time to build up more capital.
3. DON’T BE TOO CONSERVATIVE
From an investment perspective, you can’t afford to be too conservative at 40. If you are, you won’t achieve the necessary returns. Equities have outperformed all other asset classes over time and it is essential to include them in your portfolio if you need real growth. While equities tend to be volatile, this tends to smooth out over the long term.
4. RETIRE A LITTLE LATER
Postponing retirement and continuing to save can have a significant impact on the income you enjoy in your golden years. While deferring retirement is not the most attractive notion, it has a doubly positive impact in that you have more years to save, and fewer years during which you would have to live off your savings.
