You have two strong allies when it comes to making provision for your retirement: time and the power of compound interest. If you use these forces to your best advantage you are guaranteed of victory in the battle for a comfortable retirement. If not, you’ll join the throngs who have to rely on family, friends, or (even worse) the state for help in their golden years.
Until recently South Africans have been largely in the dark when it comes to the importance of a long-term financial plan. For many years everyone relied on the popular defined benefit pension fund. As long as you committed yourself to a lifetime’s labour for a single company you were practically guaranteed an adequate retirement. But all that has changed.
The shift to defined contribution redefined the savings environment
The majority of today’s retirement fund arrangements have moved from the traditional defined benefit to a defined contribution arrangement. This moves the financial liability of providing funds in retirement from the company to the individual. You can no longer rely on the company to make up any shortfalls in the retirement fund pot. We can certainly argue the case that the move to defined contribution retirement plans has made savers more aware of the link between what they put in to their savings plan and what they ultimately get out.
But this realisation hasn’t improved South Africa’s net savings position. Statistics reveal that the country is in a worse ‘savings’ position today than any time in the last three decades. In 1994 we were saving 2.5% of after-tax disposable income… By 2001 this ratio had dropped to 0.8%. Someone earning R100 000 of after-tax disposable income per annum was only putting away R800 (R67 per month) for a rainy day. Since 2007 South Africa has become a nation of dis-savers. What this means is even though existing savings are wholly inadequate, South Africans are now dipping into the pool to the tune of 0.7% each year instead of adding to it.
Right now the savings environment is pretty shocking. We are loaded with more debt than at any time in the country’s history. The Reserve Bank estimates that total debt to income has reached 78%; while the debt servicing ratio (the amount of after-tax disposable income needed to repay your loans) has crept up to an alarming 11.8%. Steep food & fuel price inflation and rising interest rates are simply adding to the consumer burden making it impossible to save!
Getting the youngsters to the front line
It’s quite clear that something has to be done. And that’s why the South African Savings Institute (SASI) has launched a campaign called Teach Children to Save (TCTS). The campaign is being rolled out to coincide with national savings month (July) and is part of an international pilot programme aimed at improving financial literacy among the world’s youth. SASI has support from various domestic partners including the Banking Association of South Africa, Operation Hope, Citi Bank and various financial sector associations.
The main drive of the project will take place on 25 July 2008 when “volunteer bankers and financial services practitioners will deliver a one-hour session on why saving is important, how to design a budget, recognise needs and wants and how interest makes money grow,” to grade 4 to 7 learners in schools around the country. The aim: to convert these youngsters into life-long savers!
The financial services industry is at the forefront of various initiatives to ‘educate’ South Africans on the importance of saving for retirement. Industry associations like the South African Insurance Association (SAIA) spend large amounts on product education in poor communities. The Association of Collective Investments (ACI) has tackled the problem from a different angle. Their Fundisa Fund offers incentives to parents (and interested parties) to save money for a child’s education.
Start saving today
Where the SASI programme differs from existing savings education initiatives is in its focus on savings principles rather than certain product classes. There is no need for a sales and marketing lean to its presentations and activities. Instead it can focus on convincing the wealthy to re-direct their expenditure from ‘wants’ to needs and educating the poorer communities about the importance of making provision for the future.
The best time to start saving is today. It makes sense for your own future and for that of the country. In the words of Elias Masilela, chairman of the SA Savings Institute: “We implore every South African to ride the rainbow and reach – in our lifetime – the pot of gold!”
Editor’s thoughts:
School was quite some time ago and we battle to remember everything we were taught over those 12 formative years. But we know that finance and investment hardly ever got a mention. So while we matriculated knowing that Jan van Riebeek landed in the Cape in 1652 we had little knowledge about how to save for retirement. Can you remember receiving any basic financial literacy training at school – and would it have helped? Add your comments below, or send them to gareth@fanews.co.za
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Added by Dave Smith, 30 Jul 2008