Most South Africans simply do not save. According to the Reserve Bank’s December 2009 quarterly report, gross savings by households as a percentage of gross domestic product increased marginally from 1.4 percent in the second quarter of last year to a still pathetically low 1.5 percent in the last quarter.
The Reserve Bank says the increase was not because people suddenly discovered the need to save but was a consequence of “tight economic conditions and stricter lending criteria on the part of banks”. And if it were not for compulsory savings, such as contributions to occupational retirement funds, the figure would probably be negative.
It is important to have savings to meet your:
· Short-term needs, such as to pay school fees or to replace a stove that has packed up. You should also aim to build up an emergency fund equal to about three times your monthly disposable (after-tax) income so that you have a financial cushion in a crisis, such as writing off your car or losing your job.
· Medium-term needs, such as a new vehicle or to put down a deposit on a home. You should aim to save a specific amount of money within a fixed period. Use any windfall, such as bonuses or tax refunds, to top up your savings.
· Long-term needs, which essentially mean retirement – without a doubt your biggest single savings requirement. As with risk life assurance, as a rough rule of thumb you should aim to have saved between 15 and 20 times your annual salary at retirement, depending on your age and number of dependants. For most people, this means you will have to save for at least 40 years, from your first pay cheque.
It is a long-term slog to achieve financial security in retirement and not many people attain it, because they do not stick to the basic rules.
The question arises why most people reach retirement with a net replacement ratio of only 28 percent. The main reasons are that people:
· Are not forced to save for retirement. Many employers do not have occupational retirement funds, and many contract workers, part-time workers, domestic workers, seasonal workers and self-employed people do not save for retirement through formal retirement-funding vehicles.
One of the aims of the government’s retirement reforms is to force every person in formal employment to save enough to provide a net replacement ratio of at least 40 percent.
· Save too little. Alexander Forbes says 17 percent of members of occupational retirement funds have contributions (employee and employer) of less than 10 percent of their pensionable income, while 40 percent have contributions lower than the 12 percent sought by the government in its reform proposals.
· Start saving too late, losing the advantages of compounded investment growth. Research by Alexander Forbes shows that most fund members retire with as few as five to 10 years of pensionable service; 12 percent retire with between 10 and 15 years; 14 percent with between 15 and 20 years; and only seven percent with between 35 and 40 years of pensionable service. On average, pensionable service of the last fund prior to retirement is 19.5 years for men and 15.8 years for woman.
If you leave a job and opt to take the savings you have accumulated in your employer’s occupational retirement scheme, you need to reinvest your savings to ensure you will be financially secure in retirement.