Category Retirement
SUB CATEGORIES General |  Savings & Investments |  Annuties | 

When time is on your side

14 January 2021 Nirdev Desai, Head of Sales at PSG Wealth

We are generally living longer and healthier lives, which means many of us will work past the traditional retirement ages. And with this longevity, we are in a better situation to allow compound interest to work its wonders.

Time is the crucial ingredient that makes compounding of returns valuable, and a longer and healthier life gives you that gift of time.

Timing the market vs time in the market
Time in the market is crucial. Dalbar studies into the effects of human behaviour vs market returns over appropriate periods have shown how poorly those who attempt to time the market often do, relative to those who remain invested for appropriate periods. Ultimately, findings support the conclusion that it is better to ensure you are in the market long enough to smooth out the impact of volatility through market cycles, rather than attempting to avoid volatility altogether.

Starting sooner brings big benefits
The graph below shows an example of two investors of the same age want to achieve R9.2 million in savings by the retirement age of 65. Investor 1 starts to save at age 20 while Investor 2 only starts at the age of 35. On a monthly basis, Investor 1 only has to save a fifth of what Investor 2 has to put away for his term. Investor 1 ultimately contributes about half of Investor 2’s total contributions and yet they end up with the same value at retirement thanks to the benefit of compound interest.

Graph 1: Compound interest compared to contributions in a retirement annuity

Source: PSG Wealth

Annual returns are now in the single digits – should I be worried?
It is true that returns for all asset classes have come down over the years. However, two things should be remembered:
1. Growth asset returns aren’t delivered in a straight line. While investors in the S&P500 (a U.S. stock market index) have experienced phenomenal returns over the last 10 years, they would have achieved just over 1% in annualised returns in the previous 10-year period.
2. While growth asset returns have come down, their relative return over cash and inflation has not. These real returns are, if anything, better in a low inflation environment than a higher inflation environment, as explained in more detail below.

Understanding the impact of inflation
If you invested R1 000 a month in a high inflation scenario (growth at 12%, inflation at 8%) it would take 19 years to achieve R200 000 in real returns of 4% annualised. In a low inflation scenario (growth at 5%, inflation at 1%), it takes just 17 years to achieve the same financial goal. Single digit returns should not deter investors. If anything, a low inflation environment is an opportune time to be in growth assets. More importantly, appropriately allocating your asset mix and being invested through the cycle will help you to achieve your goals.

How can I stretch my retirement savings further?
Pre-retirement vehicles (retirement annuities, pension funds and preservation funds) encourage individuals to save for retirement by delaying the tax liability. During the retirement phase, individuals receive attractive tax benefits annually (on contributions of up to 27.5% of taxable income) and often receive these as tax refunds. The challenge is to ensure that these tax refunds are not squandered but rather put to good gain. Investing these refunds into a tax-free savings vehicle is a perfect complement to your pre-retirement savings.

Benefits on retirement
When you retire, there is a tax-free benefit of up to R500 000 (across all retirement vehicles), with reduced taxable hurdles for those who wish to take up to the maximum allowable one third of their retirement savings as a lump sum. Between the pre-retirement savings tax benefits, being diligent and using the current maximum R36 000 annual allowance towards a tax-free savings vehicle, and the final tax-free lump sum on retirement, you can be tax savvy and make your rands stretch further.
Speaking to a qualified financial planner will help articulate your needs and maximise the opportunities available to your benefit.

Quick Polls


How to give affordable and appropriate financial advice to the low income market segment. There is little room on a R50 pm policy for advisers to be remunerated for the time it would it would take to educate & fulfil admin function. What is the solution?


[a] Eliminate non-advice sales / telesales
[b] Implement industry standards for non-advice information
[c] Introduce an insurer-funded pro-bono advice network to low income earners
[d] Reinforce the Policyholder Protection Rules
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