As South Africa prepares to celebrate Freedom Day on 27 April, 10X Investments consultant Brett Mackay lists five classic issues that stand between many of us and our own idea of financial freedom – whether that means freedom from debt or freedom from ever having to work for a living again
Delaying saving
Many people say they’ll start a savings plan next month or later in the year without committing to when and how. This year becomes next year and the next thing you know, we’re all another few years down the road and some of us are full of regret.
Putting saving off is a common error. People who start saving early give themselves a lot more than just a head start; they give themselves the benefit of compound interest, where growth builds on growth until you have a lot more saved than you could have imagined. The earlier you start, the better off you’ll be in the long run.
If you’re not sure how much you can afford, start small. Just making a start will help you stay motivated. You can always increase your contribution later. It’s advisable to increase your savings as your earnings increase. Ideally, you should be saving at least 15% of your earnings for your whole working life, but you may have started late and need to catch up or you’re planning to retire early at, say, 50, meaning you will probably need to be saving more than 15%.
Industry complexity
The investment industry has become extremely complex with thousands of funds all offering different benefits. The choice available from even one fund manager can be blinding. As a rule of thumb, don’t buy something you don’t understand (and don’t believe anyone who tells you that investing is too complex for you to understand).
Do a little research and if you’re still undecided, opt for an uncomplicated index fund that tracks the market and charges low fees. This will give you the best chance of success, and the added benefit of no nasty surprises.
High fees
Most South African investors have no idea about the fees they pay on their investments, especially (and most ruinously) on their retirement savings. This apathy plays into the hands of the retirement fund industry, which, on average, charges fees of 2-3% per year on retirement annuities.
Paying a fee of 3% per annum over 40 years will almost halve the real value (purchasing power) of your pension. And it could ruin your retirement. Instead, shop around for a low-cost provider and be wary of actively managed funds, which tend to charge significantly more without securing better performance over the long run.
Putting all your eggs into one basket
Saving for retirement is very important, but so is cash flow for daily life, which unfortunately can include unexpected emergencies. A sensible financial plan will include different savings products for different purposes, such as saving for retirement and an emergency fund.
You’d be crazy not to take advantage of the tax incentives for retirement saving offered by the government. These incentives apply to savings in specifically designed retirement savings vehicles. Essentially, if you save into one of these products, you’ll receive tax back every year. You’d be mad not to accept this free money.
That said, it would be foolish to put all your savings into a retirement fund, which you cannot access until you are 55 or older. If disaster should strike you or someone you love, you might need to access some cash quickly. As a rule of thumb, you should have at least three months’ salary in a fund that you can access quickly.
Having a plan in place that sets you on course to retire with dignity and maintaining a decent emergency fund are two key aspects of financial freedom.
Denial
Whether people think retirement is a million miles off or they are certain they’ll make a fortune one day, denial is very seldom anyone’s friend.
Whatever excuse you’re using to not engage with the obligation to put money aside for retirement, you’re wasting precious time gambling with your chance of financial freedom.
The perfect time to start saving for retirement is when you start working; the second-best time is now. Making a plan that sets you on course for a dignified retirement, and executing that plan, should be a simple and manageable process of small, regular steps.
PERSONAL FINANCE