There are a few reasons why people do not save enough for their retirement. Psychologically, it can be difficult for young people to prioritise their long-term future needs over more pressing lifestyle expenses. Not only does retirement seem so far away, but on a practical level, the task of choosing an appropriate retirement investment vehicle may be intimidating, due to a general lack of market knowledge and understanding.
Yet an independent retirement study commissioned by Just SA revealed that 3 out of 5 respondents between the ages of 50 and 65 lack the confidence that their retirement savings will last. This worrying revelation is supported by shocking retirement income statistics from the Institute of Retirement Funds Africa showing that two thirds of members have less than R50,000 in their pension funds[1].
Saving for retirement is often just as much a mental battle as it is a financial one. And despite the many more reasons why people might feel they are not in a position to save for retirement, the above figures highlight why a shift to a more positive savings mindset is so important. To get you started on your retirement savings journey and on the road to a more comfortable retirement, here are five simple steps to follow.
1. Start saving early
While hardly new advice, the benefits of starting to save from a young age should not be underestimated. Thanks to the power of compound interest, a 20-something can accumulate more retirement savings by age 65, putting away a lower monthly amount than someone who only begins in their thirties.
A good place to start is to create a budget of your income and expenditure to get a holistic picture of your fixed expenses and identify any wriggle room for savings. While adjusting to a new spending and savings regime might seem hard at first, try to consider your retirement savings expenditure as a fixed expense. You may be surprised at how quickly you can get used to having less disposable income.
2. Keep adding to your investment
Getting started is the first major step in achieving your long-term savings goal. Once you are in a regular savings rhythm, you may find that your smarter way of living offers an opportunity to shave even more off your essential spending. And if your salary increases, try to commit to increasing your retirement savings contribution by the same rate, as this will help you to save more without restricting your current lifestyle.
3. Do not dip into your retirement savings
While perhaps easier said than done, it is really important to keep your retirement savings pot separate from your daily income needs, for several reasons. Firstly, you could end up with a higher tax bill for withdrawing your savings before retirement. Secondly, as a result of ongoing market volatility since the onset of the pandemic, there is a good chance that the overall value of your investments has dropped, meaning that if you withdraw early, you are not giving your funds the opportunity to bounce back.
Most importantly, by withdrawing even just a small amount, you are reducing that cushion of comfort in retirement, which will require you to work a lot harder to earn that income back.
4. Don’t stop working too early
After years of diligent saving and planning, it may be tempting to throw in the towel early and get started on your new life of leisure and relaxation. However, bear in mind that by retiring even just five years early, you will have five years less pre-retirement earnings which means less savings on the day you retire, and you’ll need to add those extra five years of expenses in retirement to your funding requirements. Simply put, you can increase your eventual retirement income significantly by delaying your retirement, even if it’s just for a few years.
5. Try find an alternative source of retirement income
If you’re worried about not being able to save enough to meet your needs in retirement, it may be worthwhile trying to build up a passive income stream as an alternative income strategy. Similarly, a ‘side hustle’ or some consulting work in the years leading up to retirement that potentially extends into retirement, can boost your savings pot, as the same benefits apply to any additional money saved.
Whatever your age, life stage or financial situation, saving for retirement is always a good idea. And when you are finally ready to retire, it would be wise to seek the help of an experienced, independent financial adviser to decide on the best way to use your retirement savings by choosing an annuity product to provide you with regular retirement income.
[1] https://businesstech.co.za/news/finance/491907/shock-retirement-numbers-for-south-africa/