The phrase ‘Saving Towards Retirement’ is loaded. It comes standard with a serious helping of pressure because it’s the biggest financial action every working human should take. Adding to the pressure is a ton of information to wade through – with an undercurrent of fear of not having enough when it’s time to retire.
When conversations with friends turn to the subject of monthly expenses and money, I’ve started to pick up on (and what I will label as) personal money myths. Because how we think about money is so incredibly personal, that it’s important to think critically when somebody else’s personal money myth enters your thinking.
Below are 3 of these myths, accompanied by some thoughts around why they should be challenged.
1. The first step of your investment journey should be the purchase of a house – and that would take care of retirement as well.
Not necessarily, as many variables are at play. If homeownership is part of your In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. 'Saving' is not the same More plan, it’s great to enter the market when you can. In an ideal world, you would pay off your It helps to think of bonds as an IOU from the government. When you buy a fixed interest rate bond or bond ETF, you are lending money to the government in return for a fixed interest rate (also called a coupon) over time. You can invest in local and foreign government bonds. This post covers the subject in more detail: ETF: as quickly as possible by prioritising your home loan, and live happily ever after with heaps of disposable income that you can then use to build up your savings.
However, the average South African buys a new property every 7 years, with the new property 1.5 times the price of the previous property. And yes, while the value of your property increases as you scale up, the duration of your loan keeps on extending. And you would still only have one very big egg in your basket. What’s more, that egg has zero liquidity.
If you consider Saving Towards Retirement as the first step of your investment journey, you don’t need a 10% deposit for a home loan. And you can start small, setting the foundation for good financial behaviour at the onset of your working life.
2. If you put 10% of your retirement income towards your retirement savings, you’ll have enough to retire well.
This has been my personal money myth. My parents mentioned it once, I heard it in passing at the office one day, and the part that really convinced me to sign up, is that 10% is easy to calculate.
Until the Rule of 300. The brilliance lies in its simplicity, as it calculates the approximate future value of stuff in today’s money using simple math. You can make your retirement number personal based on what you value, and the life you would like to live as a retiree. Still want to be part of the wine club once you hit 65? Multiply your monthly membership fee by 300 to determine how much you need to have extra in your retirement savings pot.
3. It’s too complicated – my partner or financial advisor is dealing with our retirement savings.
Great! But here’s the thing – it doesn’t have to be. Saving Towards Retirement can start small, but ‘small’ doesn’t just mean a small amount. It pertains to knowledge as well. If the upfront homework and the myriad of products are too overwhelming, open a Tax Free Savings Account. A fully tax-free investment account is limited (as at 2021) to R36,000 a year and R500,000 lifetime limit. Only certain ETFs are eligible for this product. These posts are a good place to start: Video: Everything ETFs and tax-free OUTstanding money: Saving tax free Wealthy Maths: The impact of tax-free investing Podcast: Your first tax-free investment More and get into the habit of saving while you learn.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.