Sanlam's Benchmark Survey for 2013 shows that 51% of South African pensioners cannot make ends meet. This means that you or your neighbour or friends could face what the Brandes Institute terms "money death" - running out of money before running out of time.
According to Esther Venter, the executive dean at Milpark Business School, Sanlam's Benchmark Survey states that a main factor causing this problem is that 56% of employees only start saving for retirement at age 28 versus the recommended age of 23: "This lag in getting started with retirement saving is understandable - considering the financial demands on the typical employed twenty-something member of Generation Y."
"Objectively viewed, a picture of fiercely competing demands and expenses emerges, where no one demand can be satisfied before another," says Venter. "Think of a pack of hungry hyenas - each one vies for part of the limited resource. However - in this scenario, retirement savings should not end up as the vulture patiently waiting its turn."
"Few of the 12.1% of South Africans who complete higher education (Census 2011), do so without accumulating hefty study debts to repay. "Having secured a job, one needs transport before the first pay cheque can be earned - financing a car over 60 months will cost roughly R2000 p.m. for every R100,000 borrowed. Don't forget about running costs and short-term insurance," warns Venter. "With the fuel price having almost doubled since 2009 (only four years ago!), transportation expenses appear as one of the more aggressive hyenas in the pack, with a new predator called E-tolling about to pounce.
"Unfortunately for one's boss, one cannot live at work. Stringent requirements of the National Credit Act mean that a sizeable income and a sizeable deposit are primary hurdles for first-time property owners."
The average price of a small home (80-140 m²) for first-time buyers is roughly R730,000 (ABSA House Price Index May 2013). With a R50,000 deposit (a R650 p.m. saving for five years at 10% before buying the house) one would need to earn a gross monthly income of approximately R22,000 to qualify for a bond. The bond payment will devour about R6500 of your R22,000 p.m. gross income, or almost 40% of your monthly after-tax income. "This has led to the 'boomerang' generation - young adults in their twenties moving back in with their parents," says Venter.
Few in their twenties realise that at least basic medical and disability cover are essential in South Africa. It is no wonder that people do not start saving before age 28, if at all. Venter says that subjectively viewed, Generation Y's addiction to instant gratification, "living their lives" here and now, is considerable. High value is placed on trendy clothes, the latest technology, and (costly) social and sports activities.
"It is extremely difficult to make all ends meet, and many young working people feel that there is just simply not enough meat left on the bone to save anything towards retirement. However - it is surprising what can be achieved by employing a bit of what I call 'movie magic'. A Generation Y'er regularly spends at least R100 at the movies, overpriced popcorn included - let's consider the head start that a sacrifice of one movie per month from age 20 can achieve over savings later in life:
| Contributions from 20-30 only (10 years) | Contributions from 30-55 (25 years) | |
|---|---|---|
| Start with R1200 p.a. at 20 | Start with R2 149 at 30 (R 1200 adjusted with inflation) | |
| Escalation at 6%p.a. | Escalation at 6% p.a. | |
| Growth at 12% p.a. | Growth at 12% p.a. | |
| Contribution period: 10 years (till age 30), where after savings are left untouched to grow until age 55 | Contribution period: 25 years (till age 55) | |
| 1 200 PMT | 2 149 PMT | |
| 5.6604 I (resultant rate) | 5.6604 (resultant rate based on 12% growth and 6% escalation) | |
| 10 N | 25 N | |
| PV = R9484 at age 20 | PV = R29 987 at age 30 | |
| Growth of 12% p.a. until 55 | Growth of 12% p.a. until 55 | |
| Amount available at age 55: R500,753 | Amount available at 55: R509 783 |
"This shows clearly that it pays to start feeding your retirement plan early. It's expensive and often impossible to compensate for a late start. Equity performance (FTSE/JSE All Share index till 30 April 2013, figures by OMIGSA) over 10-year (21.3% p.a.) and 20-year (16.2% p.a.) periods adds sparkle to this magic trick.
"With a little bit of education and discipline as well as minimal sacrifices, young South Africans will be pleasantly surprised with the results they can achieve towards a relaxed, financially secure retirement. Hopefully financial planners can give their 20-year-old clients food for thought before they buy that movie ticket!" concludes Venter.
For more information, go to www.milpark.ac.za.
