Salary increases better spent on retirement - expert

(Shutterstock)
(Shutterstock)

Johannesburg - While the latest BankservAfrica Disposable Salary Index (BDSI) shows a growth in the average disposable salary in South Africa of 1% after inflation, the fact is that most employees will use this gain to improve their current lifestyle rather than to increase their retirement fund contribution.

But, with only about 10% of South Africans saving enough to maintain their pre-retirement level of consumption after they stop working, Steven Nathan, CEO of 10X Investments, says that this is short-sighted.  

“In South Africa, the duty to secure an adequate income in retirement rests almost entirely with the individual. Our country does not pay a state pension, merely an old age grant. At R1 410 per month, this will not stretch very far, and income earners who rely on this to make up their own savings shortfall will experience a drop in living standards,” warned Nathan.

“Few people appreciate how much it costs to secure a comfortable retirement. Assuming you wish to replace at least 60% of your final salary - a sound minimum target – then you need to accumulate savings roughly 10 times your current annual salary.”

He says this goal is well within reach if you consistently save 15% of your income over your working life. Unfortunately, few people save at this rate, partly because it is hard to prioritise long-term goals over short-term aspirations.

One way to resolve this conflict is to increase your savings rate over time, says Nathan. “By adding some, or all, of your real (above inflation) salary increases to your retirement fund contribution, you can achieve an adequate savings rate within a few years without eroding your current life style.”

Although many people plan to save more in later years, Nathan cautions against leaving it too late. Similarly the sooner you start saving, the less you need to save overall to match your retirement liability - more money comes from the investment return you earn on those contributions.

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