South Africans, however, are notoriously bad at saving. The Investec GIBS Savings Index ranks South Africa last out of the G20 countries in terms of its savings culture. In fact, the index shows that South Africa’s savings rate is at its lowest since 1990. And, in particular, South Africans are not saving for retirement. Old Mutual’s Savings and Investment Monitor for 2018 says that only one in three baby-boomers (those people born between 1946 and 1964) have made any formal provision for retirement, and unfortunately this figure reflects a high proportion of the black population.
This lack of retirement planning has created South Africa’s "sandwich generation"; a generation of people who are required to support both their children as well as their ageing parents. The Old Mutual report found that 38% of pensioners required their children to support them.
Although the Old Mutual report suggests that a large proportion of the country’s black population is not saving for retirement, they are in fact saving; but mostly in the informal sector. Informal savings vehicles include stokvels (which make up 61% of the country’s informal savings), followed by burial societies (25%), and then grocery schemes (13%). Unbanked cash saving made up 15% of informal savings. According to Old Mutual 89% of informal savers are black.
Investment drives economies, and saving is required for investment.
The trouble with informal saving is that it is often a short-term form of saving. Also, these savings vehicles do not generate interest payments or offer tax benefits. This means that savers are only getting out what they put in. Which according to financial experts does not generate wealth in the long term.
Changing South Africa’s savings culture
The reality, however, is that although saving gives people a huge amount of personal power and security, it is not always easy. Old Mutual advice manager, Mark Cronje, studied South Africa’s savings culture for his MBA dissertation and found that there were a number of factors impacting people’s propensity to save. Cronje found urbanisation, the sandwich generation, greater tax obligations, hand-to-mouth incomes, and the country’s financial liberalisation – which has resulted in people having greater access to credit, but at higher interest rates – all affect people’s ability to save.
These hurdles, however, do not mean that people cannot and should not save. Cronje suggested that people need to start by adjusting their attitude from one of consumption to that of saving. He also said it was incumbent on the financial sector help the emerging black middle class by offering improved access to financial instruments. “Innovative savings instruments that are simple and affordable and that reward investment are needed,” he said.
...people need to start by adjusting their attitude from one of consumption to that of saving.
But creating a savings culture within South Africa requires all stakeholders to address the issue. Cronje urged government to adopt more savings-friendly policies that would help create a better savings culture. His recommendations included:
• Greater investment into social security and retirement strategies.
• Rewarding people for their contributions to savings and investment instruments.
• Tighter controls over credit and credit extensions.
His final call was for the industry to educate people around formal savings and investment structures. In order for people to save they need to become familiar with financial instruments and feel confident in managing their money to create wealth.
Empowering yourself to save
There is nothing more empowering than being financially independent. However, long-term financial independence requires an investment to build wealth. Citadel Advisory partner, Christelle Louw, says there is a big difference between being wealthy and being rich. She explained in a video on the Citadel website: “Being rich means you have the cash flow to buy a lifestyle: beautiful clothing, fabulous holidays, big vehicles and lavish homes. But to be wealthy means that you have the asset base to generate the cash flow to sustain the lifestyle you choose [in the long term].”
But to build up enough wealth to sustain you into retirement requires planning. Many people think that belonging to their work pension scheme is sufficient to see them through retirement. This is rarely the case. As such it is advisable to seek professional financial planning advice to ensure that you are investing enough, into the right assets, to secure your future. According to Citadel, only 8% of South Africans have enough saved to replace 75% of their final income when going into retirement.
Alexander Forbes also urges people to plan for their future. “Retirement saving is a long-term goal and cannot be achieved in the last five years before retirement,” explained Kerry Sutherland in an article appearing on the company’s website. She stressed that planning for retirement takes discipline and that people need to live within their means by spending less than they earn so that there is money left over to save.
But before starting to save, most financial advisors will advise their clients to pay-off or consolidate outstanding short-term debt including high-interest loans, car finance, and furniture and clothing accounts. As you bring down your debt, any excess money can then be channelled into your retirement savings plan.
The key to saving for retirement is to save as much as you can, for as long as you can. A lot of people, however, are daunted by the notion of putting 10% to 20% of their income towards their retirement, as often advised, and as such don’t save at all. Even if you are only saving small amounts each month, long-term saving creates wealth because of the value of compound interest, earning interest on your interest. Albert Einstein referred to compound interest as the 8th Wonder of the World, because of its ability to generate great wealth over a long period of time.
There is a big difference between being wealthy and being rich.
The value of compound interest also means that it is essential that money put away for retirement, remains saved for retirement. Too many people dip into their retirement savings to pay off debts, buy a new car, or even supplement the deposit of their new home, thus depleting any value earned from years of saving.
Finally, if you are going to be disciplined in saving towards your retirement, then it is essential that you make sure your money works for you. Do this by investing in the right instruments that give you the best returns while reducing your tax burden. Again, seeking the advice of a financial planning professional is vital.