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Arno Olckers, Business Development Manager at Morningstar Investment Management SA

The impact of saving consistently through the up, down, and boring times

A sad, but harsh reality is that only 6% of South Africans can retire comfortably. “Comfortably” means that an investor retires earning 75% of their final salary in retirement, from the investments and savings put in place before their retirement. More often than not, investors only contribute the minimum percentage of their income to their retirement funding, wrongfully believing that this will provide them with an adequate amount with which to sustain their income during their retirement years. The following article considers not only the importance of saving but why doing so from an early age is so imperative.

Let’s start with the basics and why the principle of saving is so important

Savings is a simple concept – whether you are saving coins in a piggy bank, or percentages in your bank and/or investment account, it’s the principle of sticking to the habit of saving that is important. Warren Buffett’s wise words perfectly encapsulate how we should approach saving – “Do not save what is left after spending but spend what is left after saving”. It’s easy to spend money but it often leads to us not having much left to save, whereas, if you save first, you’ll spend what you have left a lot more mindfully (and cautiously).

It is important to note that, it’s the habit of saving that matters most, and less so the actual amount. Of course, the more you save the better, but getting into the habit can be the hardest part. You will be surprised how rewarding it is to see how quickly you can build up a nest egg and the incredible power of compounding.

Saving versus investing

We all want the best performing portfolio but the reality is that performance is only one of the components on the journey to wealth creation. While you can’t control how markets will perform and/or your investments, you can control the amount you save every month.

The table below shows you the end value of investing a certain percentage of your disposable income every year for 30 years.

• On the left-hand side, we show you the rate of return assumption, and at the top is the percentage you have saved of your disposable income.
• We use the assumption that the investor’s disposable income is R500 000, that it remains unchanged for 30 years and we have made no tax assumptions, to keep things simple.

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