And if that’s not enough, we are also told to put more money away towards retirement. Most South Africans don’t save at the recommended rate of 15% of income, and even that may no longer suffice. Rising life expectancies mean we may require a bigger nest egg; at the same time, future investment returns are likely to be lower than in the past.
On paper, the obvious offset is to retire later: we’ll save for longer and need the money for less time. But that’s not a realistic proposition for many people, who, like it or not, will be squeezed out of the formal labor market by advancing years and technology. For them, the only way is to save more, even if it seems impossible.
Of course, it’s not impossible – people who earn less than us also manage. Rather, it is a question of overcoming the financial iteration of Parkinson’s Law, which suggests that our spending grows to consume the available income.
One forceful way of doing so is to apply Buffett’s Rule instead: spend what is left after saving, rather than save what is left after spending. In other words, first contribute adequately towards your retirement, then make do with what is left.
That’s great for those who are just starting out and have a prudent disposition. For the rest of us, entrenched in our lifestyle and our spending habits, it’s not so easy. But it is doable, especially if we can realise savings that don’t diminish our lifestyle. To make those count, we should immediately mark and allocate them to our retirement pot, otherwise we run the risk of blowing the saved money on something else.
So how should you go about this? As a starting point, get a handle on your spending habits, by keeping an exact record of where your money is going every month. Categorising them will you give a clearer picture.
Reduce your fixed expenses
Included here are items such as property rates and levies, school fees, domestic help, car and bond repayments, insurances and subscriptions. Trading down could itself prove quite costly and potentially disruptive, but there a few things you can consider.
Invariably, your biggest expense is the interest you pay on your bond. If you have been in your property for some years, why not request fresh quotes from other lenders, or revisit the matter with your bank? Your risk profile may have improved since you applied for your initial home loan, which could translate into a rate cut of between 0,5% and 1% pa. That’s an annual saving of between R5,000 and R10,000 on a R1m bond, which you could apply towards your outstanding capital or your retirement fund.
What’s that worth to you? At a real (after-inflation) return of 5% pa, it would add almost R700,000 to your retirement pot after 30 years (in today’s money).
You could also shop around for cheaper insurance, switch from full-time to part time domestic help, move to a less expensive medical aid or settle for a second-hand car next time around (saving on both installments and insurance). And do you still need that landline at home?
Cut your consumption expenditure
You always have to budget for electricity, water, food, clothing, fuel, and mobile services but these expenses have both a fixed and a variable element. Try cutting back on your consumption. In winter, use a blanket instead of a heater. Take shorter showers and switch off your geyser at night. Don’t boil a full kettle for two cups of tea, or run the dishwasher or washing machine on a half-load. Switch off the lights you don’t need. There are obvious ways to cut your electricity bill by R100 or R200 per month. (To get buy-in from your teenage children, make this about their carbon footprint rather than your back pocket).
Also, you don’t need a new smartphone every two years. The state-of-art edition from 2015 is hardly obsolete in 2017. That way, you can save yourself a few hundred rand a month in installments, at least two years out of four.
Remember, for every rand you save monthly, and keep saving for the next 30 years, you are looking at an 840-fold payback come retirement!
Avoid interest on short-term debt
Paying interest on short term debt – be it on a bank overdraft, credit card or unsecured loan – does nothing for your lifestyle. These facilities temporarily allow you to live beyond your means, but once you are maxed out, the opposite happens – your disposable income shrinks because of your monthly interest bill. It’s a one-time indulgence that you keep paying for – at very high rates - until you settle the debt.
An 18% annualized interest on a R30,000 credit card balance translates into an annual cost of R5,400. But it could be a further contribution to your RA if you eliminate this debt, or reduce it to a level you can settle monthly. Take the short-term pain for a massive long-term gain.
Curtail your impulse buys
Invariably, some of your spending is of a discretionary nature. How many clothing items have you bought on the spur of the moment that you never wear? How much stuff in your house is just gathering dust - unread books, unused appliances, pointless ornaments? Many must-have items in the store lose their appeal at home.
One surefire way of saving is to avoid such impulse purchases. Make up a shopping list before you go out, and stick to it. If you see something you really, really want, first give yourself a cooling-off period, then put it on the list. And if you can’t curb your impulse buys, avoid the shops,
Break your habitual spending patterns
Impulse buys are just one of the indulgences we weave into our every-day life. Others include cigarettes, alcohol, designer coffee, bottled water and take-outs. Oftentimes, we see these as integral to who we are, but they are really just creature comforts we pick up along the way. Much like “movies are not the same without popcorn” you may feel that your work day is not complete without a coffee run. So you end up paying a hundred rand a week for cappuccinos, despite your employer providing free coffee. Again, that’s R5,000 you could pay yourself every year. Double that by taking a sandwich to work rather than using the canteen.
And if the average smoker-drinker cuts down by just ONE packet and six-pack per week, they would save around R400 a month, giving them R336,000 more money in retirement. Imagine how much beer and cigarettes that will pay for then.
Cut your retirement fund costs
There are also huge savings to be had within your retirement affairs. Simply by choosing to go direct, without the ‘help’ of a broker or financial adviser, and investing in an index rather than a managed fund, you can save yourself up to 2% pa in fees. Over a life time of investing, this alone could boost your retirement savings by up to 60%.
Bottom line
You’re only young once, but you’re not young forever so don’t dismiss your future self. The choices you make today will one day rule their (your!) life. If you want that person to retire in dignity, then strive to save at least fifteen percent of your income, starting now. Even when money’s tight, there are opportunities to cut your spending without diminishing your lifestyle. Mark those savings, make them permanent and add them to your retirement account. Relatively small monthly savings have a massive multiplier effect if maintained over 30 or 40 years and will boost your retirement fund significantly. You WILL thank yourself one day.
