With the economy in recession and households under increasing financial pressure, South Africans need to review their financial situation and consider adjusting their lifestyles.    

This is the view of Old Mutual Investment Group strategist Rian le Roux, speaking at the 2017 Old Mutual Savings and Investment Monitor briefing last week, who warns that the decline of the country’s low savings rate holds dire consequences for the long-term financial health of many South Africans.  

The harsh reality is that, by spending more than they earn, many households are not accumulating enough of a financial nest egg to finance future liabilities, such as their retirement.

“Look out for the cliff,” he cautions. The cliff refers to the inevitable drop in income and living standards for most people at retirement. “How steep this cliff will be is entirely dependent on how well people have provided financially for this day,” Le Roux says.  

Most people’s standard of living is too high when they are working, resulting a major cliff at retirement.

“A less lavish lifestyle during your working years can mean much less of a cliff at retirement,” he says.

“The weak economy, increases in personal taxes, and rising youth and elder dependency ratios are making it even harder for households to save, let alone save more. And just as it is becoming more difficult to save, lower investment returns are making it imperative that people actually do just that: save much more,” Le Roux says. “This developing financial landscape will place an even bigger financial squeeze and strain on households.”

Infrastructure

The collective savings of a country play a major role in bolstering the economy through financing investment in social and physical infrastructure. Le Roux says a shortage of savings for investment spending increases dependency on foreign financing to cover the shortfall.  

“The issue is that when there’s a drop in foreign investment, and domestic savings remain low, investment in physical and social infrastructure inevitably declines too.  This is precisely what is playing out at present, as fixed investment fell from 20.4% of gross domestic product (GDP) in 2015 to 19.6% in 2016, and national savings declined from 16.3% of GDP to 16.1%. If this trend continues over the medium term, it will further undermine the already weak performance of our economy.” 

The weak economy is putting considerable pressure on government finances, leading to higher taxes that make it even more difficult for people to save.

“Low savings leads to low growth, which leads to even less saving, creating a vicious cycle,” Le Roux says. “All of this is being aggravated by policy uncertainty and concerns over political and socio-economic stability.”

Longevity

Longevity is another issue that is not adequately factored into many people’s personal financial planning. “Healthier lifestyles and medical breakthroughs mean that people live longer, with many actually outliving their retirement funds and forced to become dependent on others.”  

The 2017 Old Mutual Savings and Investment Monitor shows that 66% of working metropolitan households do not feel confident in the economy.

“We urge South Africans to empower themselves by reviewing their financial situation and adjusting their spending decisions accordingly. Adjusting your lifestyle now could prevent financial problems later in life,” Le Roux says.  

He says that seeking advice from a registered financial planner is a sensible starting point. “An adviser will help you to assess your financial situation and plan appropriately for the future.”