Save now, smile later

2012-07-28 10:57

Research from the Old Mutual Savings and Investment Monitor shows that when you control your money, your satisfaction levels increase, writes Maya Fisher-French

Most people will reach retirement and discover that they actually could not afford the fancy car, expensive holidays and designer lifestyle they lived over the last 25 years.

According to Rian le Roux, an economist at Old Mutual, unless you are making proper provision for your retirement and are saving for your children’s education, you cannot afford luxuries.

This is the mistake many people make, where they believe that because they have the income to pay the monthly instalments on the car of their dreams that they can really afford the car.

Affordability is about having first met all your future liabilities, according to Le Roux. Only once you fully understand your future financial obligations and have put money aside for them, do you then have money to burn.

Le Roux also makes the point that when middle- and upper-income earners say they cannot afford to save, this is an unwillingness to save as they have diverted their income into repaying debt on cars and other short-term consumption.

The Old Mutual Savings & Investment Monitor, a biannual survey which assesses the savings habits and attitudes of ordinary metropolitan South Africans, did, however, find that in response to the economic downturn, people are starting to better manage their money.

People’s satisfaction with their overall financial situation measured out of 10 had improved from 5.7 in July last year to 6.3 this month.

Lynette Nicholson, the research manager at Old Mutual, says the increase in satisfaction has nothing to do with a change in economic circumstance, but rather that people have started to take control of their finances and this, in turn, is making them feel better about their money.

Cutting back and saving
When asked about what action they were taking as a result of the economic downturn, more than 60% of people said that they were cutting down or controlling their expenditure.

Nicholson says people are being more careful with their finances, and are starting to budget and think carefully about what they buy, and are buying only what they need.

Respondents also said that it had influenced their savings mindset and it had made them realise the importance of saving and they were aiming to build up a buffer for a rainy day.

The most popular form of savings are funeral policies, followed by informal savings mostly through stokvels and group grocery clubs. This continues to highlight the importance of group savings.

Nicholson says 20% of respondents had increased their savings into their stokvel over the last six months.

Pension and provident funds were the third most popular form of savings, but what is of great concern is that 44% of people surveyed did not have any retirement provision, even though they were employed.

Even among high-income earners, people earning above R40 000 a month, one in five had no retirement provision.

Property retirement fund
Nicholson says they have seen a significant increase in people who plan to rely on their property as a retirement nest egg, and about 54% of respondents expect to rely on their property to some extent to fund their retirement shortfall.

This figure is up from 26% last year.

This jump is possibly due to the fact that people are more aware they have not saved enough for retirement and will have no option but to turn their home into a retirement nest egg.

Nicholson warns this is not really a solution at all.

Based on the price of an average house in the middle-income suburb of Alberton, a retiree would be able to sell the property for R851 000 net of costs.

If they chose to buy into a retirement village, this would set them back R780 000, leaving only R71 000 to meet living expenses.

There are also higher levies which they would have to budget for.

Even if they moved in with their children and invested the money and drew down the recommended 5% a year for income, that would only provide a monthly income of R3 500 per month.

Nicholson says what is more concerning is that 40% of people over the age of 50 still have outstanding debt on their homes, so clearly one’s home as a retirement strategy is not a strategy at all.

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