Six habits to adopt when you’re saving for retirement

We hear so often that we’re not saving enough for retirement. People also quote statistics such as that only 6% of South Africans can retire well.

I’ve heard that this number was thumb-sucked and that it gets repeated by an industry that doesn’t really know how many people can retire comfortably.

What does “well” and “comfortable” mean, anyway? This differs for every person.

My financial adviser has worked out my savings goal for retirement by taking my current income and projecting it into my retirement years. He also worked out how inflation will erode my savings. This is to make sure that I will maintain my current lifestyle one day. There are also people who say you should save 17% to 30% of your income to be on the safe side.

What I do know, is that you can’t go wrong with these six savings habits for your retirement: 

1. Start early
   I’ve heard my actuarial colleagues say that time is like yeast for savings. This is because of compound interest – when you earn growth not only on your investment, but also on the interest you’ve earned already. It means the earlier you start, and the more you save early on, the less you have to save later (see my example below).

2. Top up when you can
   Because of the great tax breaks you receive for looking after your own retirement, topping up your retirement savings with a windfall here and there is a great way to add energy to the growth. Plus you don’t pay tax on your growth.

3. Keep up with inflation
   As I’ve mentioned above, inflation is a hungry worm that eats away at the buying power of your money. What you can buy with R500 bucks now is not going to get you far in 20 years’ time. That’s why I increase my savings amount by at least the current inflation rate every year.

4. Apply debit order discipline
   When you force yourself to save before you spend with a monthly debit order, it’s easier to discipline yourself. I’m not a Hercules who can withstand the pressures of what needs to be paid and enjoyed every month – but it helps to save upfront for my “salary” during retirement.

5. Don't jump from fund to fund
   Endlessly jumping to the next best investment costs you money. Today’s best performing fund will probably not be tomorrow’s winner. Make sure that your investment fits your risk appetite and keep your eyes on the long term. Retirement is a marathon, and over a long stretch the market hiccups even out.

6. Consider more than one basket
   You’ve heard that one shouldn’t put all your eggs in one basket. It usually means you shouldn’t put all your money in the same kind of asset to spread the exposure it can get. In this case I also mean splitting your savings over more than one product. By the time you retire, you’ll have a choice – Product A can pay out while Product B can earn a bit more growth before you need it.

    

The most important point is just to start. Let me illustrate this by showing you the difference between saving the same amount, R1 200 every month, and increasing it by 6% per year (to stay on par with inflation). We assume growth of 10% per year.

If you save for 20 years, it will grow to R1 324 418 (R412 960 in today’s terms). If you save for 30 years, it will grow to R4 403 952 (R766 773 in today’s terms). An extra 10 years means your savings can be worth more than three times more. Now that is huge.