It is better to feel a slight pinch as you readjust your budget than merely kicking the can down the road and effectively magnifying the effect significantly, says Emma Heap, 10X's head of sales
What Heap is referring to is the power of compounding, which can be a great force for good … or bad. Which way it goes depends on whether you progressively add a little more to your savings and leave it to grow over the years and decades, or if you allow small cost of living increases, such as the extra percent of VAT, to lower your savings rate, thereby chipping away at your nest egg.
Estimates of the effect of the VAT increase on household budgets vary from a couple of hundred rand a month to many thousands depending on lifestyles, but it seems certain that all South African households will have at least a couple of hundred rand less to spend from this month.
People who reduce their savings by even R100 or R200 per month are robbing themselves of the huge benefit of compounded growth. For example, investing R200 a month over 30 years in the 10X high equity portfolio, ie making a total contribution of R72 000, would result in savings of around R205 000 *.
Heap adds that there are many reasons even people with the best financial intentions come up short. One example she gives is letting the amount you save fall behind inflation or your earnings growth.
“Not adjusting your savings in line with inflation has much the same effect as reducing the amount you save.”
Also, in order to maintain a certain standard of living in retirement you need to keep your savings in line with your earnings, she says.
“You are storing up trouble for yourself in later years if you let your retirement savings become a smaller and smaller percentage of your earnings,” says Heap. “As your salary grows with inflation, or hopefully even ahead of it, so should your savings.”
It might be easy to justify not keeping your savings in line with your earnings when the cost of living goes up particularly in a sudden spurt with something unusual like a VAT increase. But, Heap adds, it is only you who will suffer “and possibly your poor children who will have to carry the additional burden of taking care of you once you can no longer work”.
She points to 10X Investments’ simple retirement savings formula: invest 15% of your income in a high equity index tracking fund for 40 years and make sure you are paying fees of 1% or less.
Fees are an important part of the equation, says Heap: “It amazes me that people will worry about the effect of the VAT increase on their household budget yet happily throw away a lot more than that every month in high and unnecessary fees.”
In conclusion, Heap says, there are almost certainly better ways to absorb the VAT increase than by reducing your savings. Start car-pooling or use public transport sometimes, eat meat less often (vegetables are all zero-rated), or find other little luxuries you’re willing to cut back on ... your future self will thank you for not sacrificing your retirement savings.
Like so many things in life saving for retirement is easier with a plan. If you don’t already have one a good place to start is with the 10X retirement calculators, which will help you establish a savings goal and then track your progress towards it.
