Procrastinating our way to poverty in our old age

Traditionally, savings month is full of stories of the hell that awaits if you fail to invest for your old age. But the message appears to be such a turn-off that fewer and fewer of us are making provision for our retirement.

Government efforts to compel South Africans to save for their own futures rather than be dependent on an overburdened state for paltry handouts have been blocked twice by the trade union movement.

The unions are intent on ensuring that members get monies earned today paid to them today, in the expectation that as a result of a lifetime of paying taxes there will be a state-financed safety net at some point in the future.

But the reality is that, globally, those safety nets are being stretched ever thinner. The elderly are living longer and are a drain on health systems in economies that are not expanding fast enough to absorb new generations of workers. And these new generations are battling to find the work to fund future pension liabilities.

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Celebrated French economist Thomas Piketty is right: money makes money. Over generations, families that manage their wealth well will form part of an elite and the rest of us will muddle along either simply surviving from month to month, or trying at least to avoid becoming a burden to our kids.

I have already mentioned the one-woman saving machine "Julia".

She started investing nine years ago with a lump sum of about R60,000 and committed a third of her annual salary to investing in low-cost index funds. When the financial crisis hit, she watched the capital value of her still-modest investments evaporate, but she continued investing, albeit less than the full third she'd committed to.

As markets rose she kept adding to her funds - and as a result she has participated in extraordinary growth, thanks to one of the most productive bull markets in living memory.

Julia works as a management consultant and earns well. From a salary of R350,000 a year in 2008, her pay now tops around R1-million annually. By and large she has stuck to her rule of putting aside about a third of her income for tax, a third for investment and a third for guilt-free living and plenty of overseas travel.

Ignore her salary for a minute and focus on her discipline. As the Old Mutual Savings & Investment Monitor showed this week, most of us procrastinate our way to poverty in our old age.

Julia started to save in 2007, at the age of 27, and committed to investing regular amounts, regardless of market conditions. By the end of 2009, she had a nice nest egg of R382,000, which had grown to R761,000 by the end of 2010. She'd hit her first million by the end of 2011 thanks to compounding growth, recovering markets and regular additions to her savings kitty.

To date, she has invested a little over R2.3-million in capital. Now, thanks to the growth in markets, she is sitting with a nest egg of more than R4-million.

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And she's only 36.

Up until a couple of years ago Julia was single, drove a safe but modest Toyota, and lived in a rented flat close to work.

Now she's married, has a baby and has bought a house - otherwise known as a bottomless money pit. Because of these new expenses, she is on track to save less than she did in 2010.

But this is where the magic happens.

Because she started early and invested solidly for nine years, even if Julia never invests another cent, by the time she hits 66, her nest egg will have grown to a considerable R70.8-million. And this is at compound growth of 10% a year.

What about the time value of money, you ask? Assuming an inflation rate of 6%, today's R4-million in savings will be worth about R23-million 30 years from now.

But Julia will continue to invest - and history suggests her savings will see solid growth.

The difference between her and the rest of us? She started to save money. What are you doing?

Whitfield is an award-winning financial journalist and broadcaster