To Save or Not to Save?
That is the question…
Saving for retirement is increasingly becoming an important decision many people (young and old) need make and the sooner we start the better. However, we all know how difficult saving for anything is, especially when the rewards will only be enjoyed in the distant future. It is especially harder to put away money and save for retirement, when the immediate costs of living (school fees, petrol, food and electricity) continue to increase.
Retirement planning and saving continues to be an important topic for discussion by Researchers, Financial Planners and insurance companies. The trend is driven by the scary reality that so many people work hard for more than 40 years and when they leave employment to retire, many of have not saved enough money to sustain them throughout retirement. We see retirees working part time after leaving formal employment in order to generate additional income to sustain themselves.
Our parents have worked hard to put us through school, often sacrificing every last cent to ensure that the quality of our education is not compromised. The sacrifice also meant that saving for retirement was not a priority for them, as the focus was getting us the best life had to offer. However, it is painful for any parent who has slaved for years to struggle to put food on the table after we have left home. I also remember a TV advert by Liberty Life that also puts this matter into perspective and its quiet scary how many of our parents are broke in retirement.
Whilst many of us have left the nest to start our own lives and pursue our careers, the reality we face is that our parents do not have enough money to sustain them during their retirement and this poses a number of problems for us. Firstly, this means sending part of our monthly salaries home to sustain our parents. This has a direct impact on our budget as our disposable income is reduced substantially and the first item we sacrifice in order to meet the monthly budget is cutting our savings for retirement. The result of this is that we continue making the same mistake our parents made and unfortunately will not have enough money for our retirement too. Secondly, given that our parents no longer have medical aid cover, they unwillingly move in with us due to their deteriorating health. This puts pressure on our already stretched budgets, forcing us to cut more savings.
A study done in America by Jacobs- Lawson and Hershey in 2005 indicated that baby boomers (people born 1946-1964) only saved at a rate of one third towards the amount of money needed in retirement. Furthermore, they found that almost 50% of individuals aged between 25-71 years in American will not have saved enough for retirement. In their 2007 study, Lusardi and Mitchell also found that only one third of American employees in their 50s confirmed to planning and saving for retirement, while the other two thirds weren’t taking retirement planning seriously.
The truth is that many of us take planning for our retirement for granted; hoping that the monthly pension contribution of 15% will sustain us post formal employment. Unfortunately this is not the case. The first mistake many professionals make when they change jobs is spending the pension pay out on settling debt instead of reinvesting the funds in a pension fund with the new employer, preservation fund or in a retirement annuity. By so doing, we ignore the benefit of compounding interest and time value of money. The second mistake is relying only on the contribution of fifteen per cent (15%) towards our pension instead of finding alternatives such as retirement annuities. Financial illiteracy, gender, risk tolerance and future time perspective has been proved to be some of the factors that influence saving decisions in Behavioral Finance. Behavioral Finance is a new field that combines finance and psychology to understand how practitioners make financial decisions.
The time for us to actively participate in how we plan for a comfortable retirement begins with us. The thought of not sustaining the standard of living we currently have in our retirement years is very scary. The inability to afford basic things such as food, gym or medical aid should motivate us to act, plan and save because the alternative is far worse to deal with.
