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The Old Mutual Savings & Investment Monitor is a bi-annual study of financial savings trends in South Africa, tracking and evaluating the financial habits and attitudes of 1 000 working urban households through face-to-face interviews conducted by independent research house Peppercorn Research. Here are some findings of the July 2012 monitor from research conducted in April and May.
Think again if you believe you will be able to retire at the age of 60 or even earlier.
Think again if you are convinced that belonging to a retirement fund will ensure you will be able to maintain your standard of living in retirement.
Think again if you believe you will be able to afford to educate your children without saving.
Think again if you think the home you own will be your pension fail-safe in retirement.
Think again if you think South Africa will escape unscathed from the ongoing turmoil in foreign economies.
These warnings come from Rian le Roux, chief economist at Old Mutual Investment Group South Africa, who was commenting on the background to the latest Old Mutual Savings & Investment Monitor. “The world is a changed place,” he says.
Circumstances have altered dramatically, Le Roux says, and South Africans have to take an entirely fresh look at their financial plans to ensure they will be able to survive the uncertain future.
Le Roux says he is sure of one thing: if you want to withstand the future uncertainty, you will have to save – and you will have to save a lot more than was acceptable in the past.
Not so long ago, the ballpark figure for how much you should save was 10 cents in every rand you earned. In recent years, this crept up to 15 cents in every rand. Now, if you want to be sure of your financial future, you will probably have to save between 20 cents and 30 cents of every rand.
Le Roux says two things drive saving:
* Your ability to save; and
* Your willingness to save.
He concedes that many people “simply do not have the ability to save. They will have to rely on government and family.”
However, Le Roux says, many people who can afford to save “choose not to save or simply fail to realise that they need to save more”.
Another problem is that “having money does not mean you can afford to buy something. By spending money, you decide not to save. You need to save money before you spend,” Le Roux says.
The current situation, where fewer and fewer people save and more and more people live on government grants, is unsustainable, he says. And the breaking point will come sooner rather than later if South Africans do not start to save and do not save more.
No one should assume that government will always be in a position to support the elderly, Le Roux says. In Europe, people who believed they could rely on the state in retirement are finding that they have to work longer, because governments cannot afford to fund their citizens’ retirement, he says.
“Working and saving for 40 years, which in the past has been accepted as sufficient, is no longer sufficient.
“While citizens of other countries are facing extended working years, South Africans still think they can retire at ever-younger ages.
“Then, many retirement fund members believe their retirement fund will provide sufficient money to maintain their lifestyles in retirement. Retirement fund members are largely oblivious as to whether their retirement provision is sufficient.
“Defined benefit fund members also run the risk of sub-inflation pension increases. Three years into retirement, they find that the luxuries of the past 25 years – the 4x4, the overseas trip – are no longer affordable. And then they think they can downgrade to a smaller home, but they discover they are locked in, because they have not kept sufficient money to maintain the property at a saleable level. After renovations and repairs, plus commissions and taxes, there is no advantage to selling,” Le Roux says.
Only six percent of retirement fund members retire financially secure, with most only realising shortly before retirement that they have not saved enough, he says.
The main reason you have to save more is that investment returns are falling as the world grapples with the financial crisis, Le Roux says.
He says if you belong to a defined contribution fund, where only your contributions are “guaranteed”, the pension you receive will be determined by:
* How long you save;
* How much you save; and
* The investment returns on the contributions.
In the case of a defined benefit fund, your pension will be based on:
* The word of your employer that the defined “guaranteed” pension, which is based on years of membership and your salary at retirement, will be paid; and
* The investment returns earned by the fund, which will determine the increases (which are seldom guaranteed) to your pension.
Pensioners of both defined benefit and defined contribution funds need a growing income in retirement, and this will depend on investment returns.
Le Roux says that over the past 53 years a balanced portfolio (60 percent in shares, 30 percent in bonds and 10 percent in cash) has provided a nominal annual average return of 16.1 percent and a real return of 7.6 percent (after adjusting for an average annual inflation rate of 8.5 percent).
His projection for the next 10 years is a nominal annual average return of 8.8 percent, and a real return of 3.3 percent (adjusted for an annual average inflation rate of 5.5 percent).
The current low interest rates are indicative of the low-return environment, Le Roux says. Some banks in the United States have cut their interest rates to zero, he says.
After taking inflation into account, interest rates are already negative, with slower economic growth resulting in lower real returns on investments.
Dependency ratios (the number of people who depend on the state for assistance) are rising because of weak employment growth.
Governments are struggling to meet the demands on their resources and are cutting back on pension and other social benefits, while raising retirement ages. South Africa will not escape these trends, so you must provide for your retirement, Le Roux says.
DO YOU REALLY KNOW HOW MUCH YOU MUST SAVE?
You need to save more or extend your working life or, more likely, do both if you want to be sure of retiring financially secure, Rian le Roux, chief economist of Old Mutual Investment Group SA, says.
However, you must first understand the structure you are using to save for your retirement, whether it is a retirement fund or some other savings plan.
But this must not be a stand-alone exercise. You need to factor in all your future liabilities, including replacing expensive assets, such as motor vehicles; medical care; educating your children; and caring for dependants, such as your children and possibly your parents. You also need to understand how inflation will affect your savings.
“You must fully consider all the risks you face – and do not fool yourself by being conservative,” Le Roux says.
You should ask a financial adviser to help you to assess how much you need to save, he says.
The sooner you start to save, the better, Le Roux says.
“Time is your best friend when it comes to building capital.”
For example, if you had invested R250 a month in the Old Mutual Investors’ Fund (a unit trust) from January 1990, you would have R469 000 today, having contributed a total of R68 000. This shows the power of compounded returns over time.
If you had increased your contributions by 7.5 percent in January every year to take account of the effect of inflation, you would have invested R164 000, but your savings would be worth R770 000 today.
SHIFT FROM PANIC TO ACTION
Most South Africans are out of touch with their finances, even though their financial stability is steadily improving.
The shift from panic (“I can’t afford the cost of living!”) to action (actually cutting back on spending and paying down or avoiding debt) is again evident in the latest Old Mutual Savings & Investment Monitor, and there are early indications that this is enabling some (but not all) metro dwellers to save (either more or for the first time).
The latest monitor shows that 45 percent of those surveyed who were saving more than they were a year ago have seen their incomes increase, allowing them to save more.
Lower-income South Africans save more than their higher-income compatriots even though, proportionally, their living expenses place a greater demand on their household incomes.
Old Mutual researcher Lynette Nicholson says age and life-stage are the primary determinants for why people save. For example, the older a survey participant, the more likely that he or she will prioritise saving for retirement, whereas younger participants will prioritise saving to buy a motor vehicle.
The Old Mutual Savings & Investment Monitor shows that higher earners carry a larger debt load than lower earners despite living expenses making a lower demand on their household incomes.
About 37 percent of those surveyed say they are saving less than they were a year ago, but the 31 percent who say they are saving more is the highest since the survey in November 2009.
Nicholson says the increase shown in savings comes mainly from the increased savings of lower-income households.
Savings could be through monthly contributions to stokvels and/or formal savings/investment products.
Reasons for savings range from six percent saving for the cost of marriage (including lobola) and for home appliances and furniture through to 50 percent for the education of children.
In return for prioritising their children’s education, 40 percent of respondents believe their children should care for them when they are old.
Saving for retirement is the objective of 35 percent of respondents, while 26 percent are saving for housing.
The Old Mutual Savings & Investment Monitor reveals that only four percent of the 1 000 people surveyed have always had some savings, have been financially cautious or have been in control of their finances.
Of those surveyed:
* 29 percent say they are now more careful with their finances. This percentage is fairly even across respondents of all income levels.
* 23 percent realise the importance of saving and have built up some form of emergency fund.
* 15 percent have closed a shopping account and moved to paying cash in order to avoid debt.
* Nine percent shop around and compare prices.
INCOME DETERMINES FINANCIAL BEHAVIOUR
Income levels remain one of the most significant determiners of saving and spending attitudes and behaviour, the Old Mutual Savings & Investment Monitor shows.
Old Mutual researcher Lynette Nicholson says there are also differences along racial lines, but these stem from differences in economic status and level of education more than anything else.
Similar patterns emerge among wealthier respondents, who:
* Are better planners and are more prepared “to get their hands dirty” when dealing with their finances;
* Have a longer savings and planning horizon;
* Are more confident about financial matters (but are also keen to learn more) and generally feel they are better informed; and
* Are more likely to be savers.
Lower-income earners, on the other hand, tend to be:
* Weaker planners, having short-term horizons that are more focused on meeting immediate needs.
* Less confident about, and more likely to be confused or intimidated by, all things financial. But they are also very hungry for financial knowledge and education.
* Weaker savers, because of their financial reality rather than through a lack of will.
10 WAYS TO BECOME A SUPER-SAVER
Here are 10 tips that should help you and your family to save:
1. Live economically. Don’t buy things you do not need and don’t try to keep up with friends and neighbours. Everyone’s needs are different. And the friends or neighbours whose lifestyles you may want to copy could well be living beyond their means, unwisely financing their lifestyles with unnecessary debt. Live your life according to your needs.
2. Develop a savings mindset. Save water, electricity, money. Don’t waste anything of value – recycle, pass on old clothes, swap children’s toys with other parents instead of buying new ones, and convert things you no longer need into money by selling them.
3. Teach your children to save from an early age. If you teach your children now, it is less likely that they will get into financial trouble when they are older. One of the best ways to teach children about money is to get them involved in the family budget. This will help them to learn that making financial decisions is about weighing up the value of one thing against another and choosing one thing and forgoing another. You can also teach children the value of money by giving them tasks to earn pocket money – but these should be in addition to family chores, which should be done for free.
4. Look after the things you have. Take pride in what you have worked hard to achieve. Respect your own efforts.
5. Don’t make excuses about why you do not save. Excuses such as “I am too young to save”, or “I will start saving next month or next year”, or “Only rich people save” will not get you anywhere, apart from facing a financial crisis, probably sooner than you expect.
6. Start saving consistently for retirement from the day you earn an income at your first job. Learn about the power of compound interest – namely, the longer and the more you save, the more you will earn in interest and investment returns, which in turn will earn more interest and investment returns. You will be amazed by how soon your investment returns could become a greater amount than what you originally saved. Consider saving at least R15 of every R100 you earn. You will soon get used to it.
7. Avoid borrowing money. It is cheaper and more rewarding to wait until you have saved the money for the items you want. It is better to spend money you have earned than to spend money you still have to earn.
8. If you are in debt, pay it off as fast as you can. Cut up your credit and store cards if you cannot pay off the balance in full every month. Use a debit card instead, then you will spend only money you have. And cuts in interest rates should be used to pay off debt – not as an excuse to borrow more money.
9. Shop around before you buy. Compare prices and benefits, and question the value of each purchase before you make it. Ask yourself questions such as: “Will this build my assets?”, or “Do I want it to show off?”, or “Can I get it cheaper elsewhere?”
10. Learn the difference between a want and a need. You may need a car to drive to work. That is a need, but buying a Porche so you can drive to work would fulfil a want, not a need. Something much cheaper will fill the need, particularly if you buy the car for cash!
MANY WOMEN STILL SEE FINANCES AS ‘MEN’S WORK’
Women need to develop the confidence to take control of their finances, Old Mutual researcher Lynette Nicholson says.
The Old Mutual Savings & Investment Monitor shows that almost one in three women agrees that men are generally better at handling finances than they are, Nicholson says. Almost two-thirds of men think so, too.
But this attitude is changing, with younger women more confident about handling their finances, while most women respondents (68 percent) say they are better at handing finances than are their mothers.
Nicholson says another difference between men and women is their perceptions of financial vulnerability. Almost 40 percent of respondents with a partner fear not being able to cope if their partner were to leave them. Women feel particularly vulnerable: 57 percent of mothers with a partner, against 31 percent of fathers with a partner.
The Old Mutual monitor looks at the different attitudes of men and women, fathers and mothers in partnerships, and single mothers.
About 40 percent of fathers with a partner say they “hate dealing with my finances”, against 34 percent of mothers with a partner. Overall, 39 percent of men and 42 percent of women say they hate dealing with their finances.
However, 81 percent of men and women, measured separately, say they are “always trying to become more knowledgeable about financial matters”. Despite this, the world of finance confuses 39 percent of men and 44 percent of women.
Single mothers (70 percent) are the most conservative about spending, not buying until they have enough money. They are followed by fathers with a partner – 66 percent are cautious about spending.
Nicholson says women’s preference for store cards is notable.
The max-the-plastic brigade is headed by mothers with a partner, with only 61 percent waiting until they have sufficient money to spend.
Nicholson says moms are probably more cautious in their spending, because the survey shows they are more likely to feel that:
* Their lives are not properly organised.
* They have to keep putting plans to improve their lives on hold; and
* More than half struggle to make ends meet each month.
She says single moms are also more willing to sacrifice family time to get ahead in life, but they are also more likely (58 percent) to look to their children for support later on in life, against 42 percent of mothers with a partner and 38 percent of fathers with a partner.
Fifty percent of single mothers believe government will look after them if they cannot look after themselves, against 36 percent of mothers with a partner and 27 percent of fathers with a partner.
Single mothers (31 percent) are also more secretive about discussing money matters with family, against 16 percent of parents with a partner.
Nicholson says the survey seems to confirm the existence of the “glass ceiling” and lower pay for women.
“In those instances where their partner is working, we asked whether they earn more or less than their partner. Some 75 percent of men claim to earn more than their partner, compared with only 13 percent of women.”
Mothers with a partner and single mothers make greater use of informal savings vehicles. The occurrence of precautionary savings (insurance and medical scheme cover) is highest among parents with a partner and lowest in the most vulnerable segment, single moms.
The highest occurrence of “protective” insurance policies is among fathers and, in particular, among fathers with a partner. This includes the uptake of life assurance, short-term insurance and medical scheme cover.
Most parents, with the exception of single moms, prioritise education savings policies. Nicholson says this exception may be due to affordability and/or the failure of formal institutions to offer a product that suits the needs of single mothers.
DO YOU HIDE SAVINGS FROM YOUR PARTNER?
The Old Mutual Savings & Investment Monitor reveals some interesting things about South Africans: we like to splurge and almost 20 percent of us are not totally frank with our partners.
Of those surveyed, 18 percent admit they have a secret stash of savings of which their partners are not aware. This practice is more prevalent among lower-income respondents, and men are more distrustful than women, the monitor found.
About 50 percent of couples say financial matters are a source of conflict. The points of friction are over-spending on items that one partner sees as a waste of money; differences over financial priorities; impulse spending and not sticking to a budget; and whose turn it is to pay for something.
If they received a windfall equal to one month’s salary, 40 percent of respondents say they would spend the money, spoiling themselves or their family or buying appliances.
But if the windfall was equal to one year’s income, respondents became more serious about how they would use the money.
The percentage of respondents who say they will save a windfall rises from 35 percent if the windfall is equal to one month’s income, to 50 percent if the windfall is equal to a year’s income.
However, the percentage who will pay off debt drops from 24 percent, in the case of a one-month windfall, to 16 percent (one-year windfall).
The percentage who will use either windfall to pay for education remains constant at eight percent.
The more meaningful amount raises the percentage of those who would use the money to start a business, from three to eight percent, as it does to the percentage who would use the windfall to buy or improve property, from seven percent to 27 percent.
(The total is greater than 100 percent, because some respondents have more than one objective.)
Old Mutual researcher Lynette Nicholson says there is very little difference between men and women and racial groups, except that the younger generation wants to spend more now.
TURN YOUR DREAMS INTO REALITY
Whether your dreams are big or small, most realistic dreams can come true if you plan and save the money, says Mohale Ralebitso, director of Old Mutual marketing, communications and corporate affairs.
“The path may not be smooth, but, little by little, you can make a big difference to your own life.
“If you avoid debt or pay off debt as quickly as you can, you will speed the process,” Ralebitso says.
To make your dreams come true, you need to follow five steps:
1. Clearly state your dream. Think about the future and what you want for you and your family. Discuss the dream with your family.
2. Write down your short-, medium- and long-term goals, and set time-frames in which you want to achieve them.
3. Develop a savings plan. Decide how much money you will have to put aside every week or month to reach your goals and where you will save or invest to earn the best returns on your money, without being reckless. You may have to use different financial products to help you meet your different goals.
4. Draw up a household budget, together with your family. Know where every cent of your income goes and where you can cut back on consumption so that you can meet your commitments to your savings plan. Revise your budget regularly so that it remains realistic. Be realistic – there is no point in drawing up a budget that you fail to meet month after month. Saving should be the first item on the spending side of your budget, but you are not saving if you withdraw the money before the end of the month.
5. Stick to your plan. Make saving a habit. Tell people close to you about your dreams – talking about your dreams will make you commit to them. Do not let life’s challenges deter you from pursuing your dream.
Ralebitso says your savings plan will be your path to financial freedom. By focusing on the long term, you can ward off unnecessary spending and progressively achieve your dreams.
* Visit www.oldmutual.co.za/savingsmonitor for more advice on saving. The site also has useful financial calculators and a budgeting tool you can download.
* To speak to an Old Mutual financial adviser or affiliated broker to help you to compile a savings plan, contact 0860 WISDOM (947366).