It’s possible to have a comfortable retirement - especially if you start young

Ryan Knipe shows young South Africans how to save

If South Africans managed debt more effectively and started planning for retirement at a younger age they could easily afford to retire comfortably.

Eight years ago household debt as a percentage of disposable income was 50%. This is now closer to 80%. “This means that each month the average salary-earning South African will spend nearly their whole pay packet paying off debt, leaving nothing for investment or retirement planning” says Ryan Knipe, Head: Advisory Services, Alexander Forbes Retail Holdings (Pty) Ltd.

While these stats are certainly very bleak Knipe believes that if people changed their priorities the country’s chronic levels of indebtedness could be reduced.

South African’s scary debt levels and inability to save and invest is not a financial phenomenon. Instead, it is a priorities problem since South African’s have failed to interrogate and properly understand value. In short “we need to re-learn what real value is and what true wealth represents” says Knipe.

Right now wealth is perceived as being seen to be spending on depreciating assets that enhance the image of a successful lifestyle, rather than “spending on the savings and investments that break the debt cycle and build real wealth” explains Knipe.

Getting the fundamentals of debt management, saving, investment and retirement planning right, however, requires a perspective shift. Instead of living from one salary cheque to the next, young people should have a clear plan and end goal in mind, especially regarding retirement.

Even a slight priority shift would allow people to begin laying the correct foundations for a lifetime of financial planning and adequate retirement provision - sufficiently early in life.

To make retirement planning easier to understand and manage, young people should construct financial plans with both clear long term goals as well s shorter near term goals.

Since so many young people simply can’t imagine retirement, let alone see themselves at 65, realistically achievable short term goals that can be ticked off when reached allow people to see progress early on. In this way “saving, investing and building a retirement income will become a real, understood and, above all, achievable part of everyday life” explains Knipe.

The first step that young people should take in liberating themselves from debt is to start a detailed budget. Most people think they know what they are spending their money on each month. Yet when “they sit down and itemise their spending they are always surprised to see how much they waste” reports Knipe.

For example, young couples with perhaps their first child, renting or paying the bond on a flat tend to do a lot of take away meals, go out to dinner a few times each month, spend a lot on music, entertainment and electronic and fashion goods. They also usually have one or two unnecessarily expensive cars.

Most young people living like this will say they can’t afford to invest or plan for retirement “and they genuinely can’t as they are indeed spending all their money” says Knipe.

Putting together a detailed budget, however, usually shows that by perhaps doing one less take away meal a month, plus each spending just a little less on clothing couples could save up to R500 a month. And even more can be saved if young people drove less expensive or older cars more appropriate to their level of income.

For example, assuming an annual average return of 10%, if a 25 year old started putting just R500 a month (subject to inflation increase) into an investment based product, by age 65 this would equate to a retirement lump sum in excess of R3 Million - if invested in a retirement product such as a Retirement Annuity.

Leaving this process to your late 30’s or early 40’s as most South African’s do now “puts you at a great disadvantage as you have forfeited the multiplier effect of time and will need to contribute a larger chuck of your income” warns Knipe.