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Lessons from the latest savings and investment survey

24 July 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africans save way too little and make poor investment decisions. This harsh line was among the conclusions in an economic presentation by Old Mutual economist Rian le Roux. He was unpacking some of the findings in the group’s June 2012 Savings and I

Mohale Ralebitso, head of Old Mutual’s Marketing, Corporate Affairs and Communications division observed that uncertainty over the economy and its impact on personal finances was causing many South Africans to delay making important financial decisions. Although the insurer criticised individuals for not doing more to build up a retirement nest egg it also acknowledged the difficulty in finding cash for savings in cash-strapped households.

Those who can, don’t

A single mother, single child family earning R15 000 per month (gross) would probably be R20 in the red each month despite running a tight budget – without saving a penny! Expenses quickly mount up and include basic items like rent, groceries, tax, medical insurance, car repayment, school fees, car insurance, cell phone, petrol, water and lights and a tiny allowance for entertainment. This dilemma exhibits in many low and middle income families where finding spare cash for savings is almost impossible.

Unfortunately those who can save don’t. “Many South Africans will discover three years into retirement that they could not really afford the luxuries of the previous 25 years,” notes Le Roux. He says that purchasing a new vehicle or going on an overseas trip based simply on an assessment of monthly incomes and expenditures is incorrect. You must first consider whether your retirement is fully provided – and only then consider spending on luxuries. The bottom line is that one should begin saving for future liabilities (such as children’s education and the depreciation of primary residences) and retirement as early as possible.

There are very real risks in how financial advisers and their clients go about this process at present. Potential icebergs on the voyage to retirement (think Titanic) include poor understanding of existing pension fund arrangements and an expectation that your primary residence will “fund” retirement. Members of both defined contribution and defined benefit funds seem oblivious as to whether or not they are under-funded. “I suspect most DC members are badly under-provided,” says Le Roux. “And DB fund members run the risk of sub-inflation annual adjustments due to inflation.” As for homeowners they are unaware of the impact of depreciation on their house values… Anyone who has tried to sell their primary residence and downgrade to a retirement home will be disappointed with how much “change” is left after the transaction.

Calling all financial advisers

We were surprised that one of the survey findings was a continued distrust of financial advisers. When asked why they were not approaching financial advisers to assist with their financial planning requirements, 43% of respondents indicated they could not find someone they could trust. We wondered how many of those surveyed had actually tried to find an adviser, but that is for another debate. The fact is that financial advisers have a critical role to play in South Africa’s savings environment. Advisers are there to assist clients in achieving the Holy Grail of complete risk and investment “cover”. And trusted or not, 41% of people still mention advisers as their preferred source of financial information.

Le Roux acknowledges that financial advisers play a crucial role in advising clients how much to save. He believes that advisers should make sure that their clients:

· Fully understand their existing retirement provisioning including the type of fund (defined benefit, defined contribution or self-provided) and whether adequate provision is being made;

· Fully understand their future financial liabilities (retirement, asset replacements, healthcare, education needs, and caring for parents and/or children to name a few); and

· They must fully consider all the risks they face – including that posed by inflation.

“South Africans must be empowered with information on how to get out of debt and grow whatever money they have,” concludes Ralebitso. By doing so, Old Mutual hopes its overall Savings and Investments “measure”, currently pegged at 6.3, will move closer to a perfect 10.

Editor’s thoughts: The half-a-percent cut in interest rates announced last Thursday will certainly put a few extra rand in most bondholders’ pockets. But tough economic times mean that this extra cash is diverted to cost of living rather than saving. Would you agree that low and mid-income households have limited capacity to save – and is there a solution for this situation? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Paul C, 01 Aug 2012
Most South Africans earn way too little to be able to invest.
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Added by Irene, 26 Jul 2012
The real reasons people are unwilling to save: 1. Financial advisors only sell products on which they can score the most for themselves and have therefore lost the confidence of their clients. 2. Retirement funds have been plundered by advisors, consultants and administrators with their fees and this has been allowed to happen by inefficient trustees and regulators. And the reason people can't save: Forget about the "official" inflation rate. The reality is that regulated prices (e.g. fuel, electricity, vehicle & driver licence fees, etc) show above-inflation increases, local governments have adopted stealth tactics in levying ever-increasing additional fees on basic services (in many instances these fees are now higher that the cost of the service itself) and inefficient government services (e.g. education, security, healthcare, etc) has resulted in the diversion of funds away from consumption or savings to cater for these costs. Government and the financial sector has, and continues, killing the goose that lays the golden egg - there is just no more that can be had from ordinary folks. Start saving from an early age? What a joke. Once the bare necessities have been taken care of, there is NOTHING left and if you do put away something for emergencies or retirement, the financial predators gobble it all up.
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