July 24, 2010
By Neesa Moodley-isaacs
South Africa is in the middle of a savings crisis and the situation could get worse, but you can help to improve both your situation and that of the country if you minimise your debt and start saving as soon as possible. During National Savings Month, the acsis/Personal Finance Financial Planning Club hosted Andrew Bradley, the chief executive of financial planning company acsis, who spoke about the savings crisis.
A combination of particular weather elements can result in what is known as a "perfect storm", which can be highly destructive. Similarly, a combination of poor financial decisions, longer life spans, high levels of debt, low levels of saving, under-insurance and poor investment choices have created conditions in South Africa for a "perfect savings-crisis storm, Andrew Bradley of acsis says.
Longevity. Bradley says age expectancies worldwide have changed significantly in the past and are likely to change going forward. For example, if you were the average person, in:
1800, you would have died 27 years earlier than today's retirement age of 65 (at the age of 38);
1900, you would have died 12 years earlier (at the age of 53);
2000, if you were 65, you were expected to die between the ages of 77 and 80; and in
2100, people aged 65 will be expected to live to 130.
"Aubrey de Grey, a professor of gerontology, or the science of ageing, has said that the first man to live up to 1 000 years is probably already alive now, and might even today be between 50 and 60 years old. At the time of making the statement a few years ago, he was laughed at, but today he is being taken more seriously," Bradley says.
He says if you start work at the age of 20 years, work for 40 years to retire at 60 and then live to the age of 100, you will effectively need enough retirement savings to last you the same period as your working life span.
"This is not a trivial requirement. Financial planning today needs to take into account changing life spans - advances in medical science mean that longevity has become a simple reality," he says.
Debt. Bradley says that consumer debt has crept up to a ratio of 80 percent as a percentage of disposable household income, and people are also saving a lot less. "In fact, the rate of saving has fallen so far that South Africans are now 'dissaving', which means we are spending more than we earn," he says.
He says that, according to the South African Savings Institute, the current saving (or dissaving) rate is a negative 0.4 percent as a percentage of disposable household income.
Life assurance. A study carried out a few years ago by True South Actuaries and Consultants showed that South Africans do not have sufficient life assurance. The conclusion of the study was that South Africans have a shortfall of R4 trillion for life assurance and a shortfall of R6 trillion for disability assurance (see graph above).
"I went through the data used in the study and found that the results, scary as they are, are actually understated because the calculations used were based on the assumption that you would not need the cover beyond the age of 65. This means the actual shortfall is a lot worse," Bradley says.
Chronic malady
The unfortunate scenario is that most South Africans are chronically under-insured, under-saved and under-invested despite positive factors such as:
High levels of affluence and education;
A huge range of financial products and service providers; and
Unprecedented lifestyle choices and longer, more active retirements.
"The current generation is the wealthiest generation of all time and education levels are constantly improving. The problem is behavioural and psychological. People are living for the day. It is no longer a question of knowledge and understanding but how to get people to change their mindset so that they manage their finances better and plan for the future," Bradley says.
Common errors include:
Underestimating your future liabilities, particularly those relating to children (for example, the cost of nappies and education);
Not checking whether the money you are saving for your retirement will be sufficient; and
Failing to check the risks you take when you invest.
THE ROLE OF SAVINGS IN OUR ECONOMY
There are two ways to save: one is by putting money into savings accounts, savings policies and investments, and the other is by holding back on your spending to pay your debt off sooner, according to the Old Mutual Savings Monitor.
Failing to save can have serious consequences on all levels - for individuals, companies and the country.
People save for their future expenses and their retirement - if you save too little, you can end up with financial stress in your retirement.
Companies retain part of their profits to finance the replacement of equipment and infrastructure as well as for expansion. If they don't do this, the resulting under-investment in the company can harm the company's efficiency and growth.
Government saves when it uses the surplus money from tax income to invest in social and physical infrastructure.
According to the Old Mutual Investment Group (Omigsa), if we save too little as a nation, the consequences could include:
The country's infrastructure (for example, roads, bridges and power stations) will suffer;
Social infrastructure such as schools and hospitals will suffer;
Government will have to take on an added social burden because more people will qualify for social grants as a result of not having saved enough for their retirement.
Bradley says big capital inflows from foreign investors in the past decade have helped to ease the savings shortage in our country. "But foreign inflows are fickle and can stop at the drop of a hat. If this were to occur, it would leave South Africa with a heavy adjustment process requiring a significant increase in local savings. Failing this, there could be significant job losses," he warns.
WHAT'S THE SOLUTION?
Andrew Bradley says the only real solution is to save more as a nation. High savings rates are a critical component for strong economic growth and high employment levels. Other requirements for growth include sound government policies and political stability.
The best thing you can do is to start saving as soon as possible – the earlier you start, the more interest your money earns, Bradley says.
One of the worst things you can do is to access your retirement savings when you change employers. “You might think it’s only R50 000 and you can just save an extra R10 000 for the next five years to make up the difference, but by then the ‘potential saving’ you would have lost out on could be as much as R100 000, and you will have paid back only R50 000 into your savings.
Trying to play catch-up in this way is dangerous and you are unlikely to ever really make up the shortfall,” he says.
Finally, when you make any investment, make sure you are entrusting your money to reputable institutions with proven credibility, and steer clear of excessively high “guaranteed returns” or get-rich-quick schemes.
“If it sounds too good to be true, the chances are that it’s |not true. Err on the side of caution, and structure your investments so that your money always remains in your name,” Bradley says.
UNIT TRUSTS 'NOT USED ENOUGH' FOR SAVING
According to the November 2009 Old Mutual Savings Monitor, unit trust funds are the savings vehicle of choice for nine percent of people born before 1965, while only two percent of people born after 1965 use them to save.
“This is an example of a poor financial decision – unit trust funds are very flexible compared with contractual savings vehicles such as endowment policies, which tie you into fixed payments and penalise you for making early withdrawals. People seem to be using the wrong investment structures,” Andrew Bradley says.
He says that, as one of the most cost-effective investments, unit trust funds seem a logical choice but seem to be used more by higher-income groups. Ten percent of households with a monthly income of R40 000 and more are using unit trust funds compared with only five percent of households with a monthly income of between R20 000 to R40 000 and four percent of households with a monthly income of between R6 000 and R20 000.
Funeral policies (which are not savings products) are the most popular financial product option across all income categories, with 61 percent of people using them.
The Savings Monitor further shows that 45 percent of people are saving for a rainy day, 31 percent for education, 28 percent for retirement and 22 percent for a car.
“It becomes clear why we have a negative savings rate, when almost as many people are saving for a car as those saving for retirement. This shows poor financial planning and is a prime example of South Africans living for today instead of planning for tomorrow,” Bradley says.
  
 
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