Don't fritter away financial fitness
During a recent discussion with a journalist, I was asked to identify the biggest mistakes made by investors. My response was reflexive.
I believe people start saving far too late in life for their retirement, I told her. I could sense her frustration at my pious response. She wasn't seeking penitence but rather a few meaty ideas for a feature. Without giving her a chance to react, I quickly added that she could include legacy holdings, faith in gold, bottom-drawer hoarding, ego and supposing that buying a home was a good investment. There were plenty of other drawbacks that I went on to explain and elaborate.
Regardless, though it may appear virtuous, the sad reality is that most people like to postpone preparing for retirement until it is way too late.
Whenever I wish to put this point across, I remind people that - give or take a few years - their working life probably spans 35 years (ages 25 to 60), during which time they have to squirrel away enough money to provide for around 25 years of retirement (ages 60 to 85).
They don't have to be maths majors to realise that, to enjoy their senior years like the elderly couple sipping tea on the stoep of their cosy coastal cottage in the Old Mutual ads, they will need to set aside a big chunk of their monthly incomes, a lot more than they are doing at present, even taking account of their mandatory pension fund deductions. Their pension funds will certainly aid them in retirement, especially if their firms are matching their monthly contributions, but they cannot rely on them solely to fund a lifetime of financial bliss.
Admittedly not everyone shares my concerns, arguing that, in your golden years, lifestyle demands, and hence income requirements, would be a lot lower than while raising a family or working yourself up the executive ladder.
Hopefully, though, by the time you retire, the children would have left home, your appetite would be less voracious and it would no longer be important to impress the neighbours in your complex riding around in a spanking new BMW. While your medical expenses might increase, you should be well covered by insurance.
As Yogi Berra, the legendary US baseball player and manager, known for his tautological witticisms, quipped: In theory there is no difference between theory and practice, in practice there is.
In defence of my theory, I have discovered, in practice, few pension funds consistently outperform the Consumer Price Index. At our present rate of inflation at 5.5%, pension fund payments will need to grow by at least 30% in five years to maintain their current purchasing power. Even at 2% inflation, can you imagine the increase required over 25 years?
Without labouring the debate any further, how should you build a sufficient stash to supplement your pension plan?
South Africans are notoriously poor savers. Our savings rate is close to zero, meaning we rely appreciably on other countries' savings to fund our growth. We borrow extensively so we can buy lavish new houses, designer labels and luxury SUVs. Without the extension of credit, our economy would hardly grow at all.
The problem is that when you are heavily indebted to the bank, there is little margin left to sustain an investment vehicle for your future comfort and protection. In the end the state (or, more pertinently, the taxpayer) carries the burden of caring for those who can't provide for themselves.
Good financial habits should be taught from an early age. We should insist on time to explain to the younger generation how the economy functions, how businesses create wealth and jobs, why we pay tax and why it is important to save and invest.
Finance and economics are pretty dry subjects and, given the choice, most adolescents - and adults - would prefer to hang around with a personal trainer or interact on Facebook than understand why the stock market moved up or down. But it is vital for us to establish a culture in the country that allocates as much time and effort to its financial health as it does to its physical, spiritual and recreational wellbeing.
It's a humbling exercise acknowledging who we are financially and what we're really worth in rands and cents. But the good news is that it might push us to make lifestyle choices that oblige us to live within our means. It drives us to develop the things that can deliver us increased earning power and a path to peace and security in our senior years - our own skills and talent.