The statistic that only 6% of South Africans can retire comfortably is often quoted in the media – usually in the context of how dismally we fare when it comes to saving for retirement. While we are a nation of poor savers, the good news is that there is always an opportunity to change the outcome. The catch, however, is that you must make a start and you’ll need to stick to the plan.
The scenarios you are presented with during a financial needs’ analysis are based on a few key assumptions and typically take inflation into account. These assumptions, and the fact that the results compound over time, can cause the numbers you are presented with to escalate exponentially.
If you have fallen behind on your retirement targets (and even if you have not), your initial reaction to the 6% figure may be emotional, rather than rational. Let’s assume you’ve been advised to accumulate R12 million in capital (your own numbers will depend on your specific circumstances).
“What do you mean I need to have saved R12 million by the time I retire? How is that even humanly possible?” you may ask. Numbers like these may seem overwhelming, especially compared to the numbers on our payslips and in our bank accounts. The enormity of the implications of what saving for retirement entails may lead us to feel we are doomed from the start, and as a result, many people give up before they even begin.
Focus on what you can control
Your emotional response to the numbers in your retirement calculation can paralyse you and prevent you from taking action. Giving up before you start is a sure way never to achieve your goal. Instead, understand the trade-offs you are making today, and know what is within your control and what is not. Maybe you can work longer than you initially thought, in return for saving a bit less. Maybe you can delay buying a new car by another year or two. Maybe you will only save R10 million and have to cut back on your lifestyle a little.
Understand, however, that the world looks very different to a retiree who made those trade-offs along the way and who is sitting on a R10 million retirement lump sum, and a retiree who cashed in their pension fund on a few occasions, never increased their contributions, and only has R2 million to live from. Even if you fall short of your R12 million target, a close miss is better than missing it by a mile.
Make compounding work for you
Sometimes, we simply cannot quantify what it will take to achieve what we want. “Saving R500 a month? How is that going to help?” you wonder, but when you combine the numbers with time and compounding returns, you’ll see magic happen. Once you realise that your accumulated capital translates into the ability to generate an income in retirement, you understand how your actions add up to enable you to take charge of your future.
You can always challenge the assumptions. Inflation could be higher. Investment returns could be lower, and none of us know for sure what will happen in the future. If you look at a period of poor performance in local equities, for example, chances are that over a longer period, the returns will outstrip inflation and prove that sub-par returns over the short-term won’t necessarily damage your investment overall in the end.
The principles that drive saving for retirement apply for any other investment decision. You need to remember to remove emotion from the equation and focus on the factors under your control. Most importantly, you need to remember that a plan only works if it is implemented. Therefore, above all else, understand the numbers and make them work in your favour.