Saving for retirement may not be a top priority for young people who are focused on tertiary education and making early career choices. Although retirement may feel far away, the choices young South Africans make tomorrow impact their future security. Being equipped with the tools and skills to save for retirement is crucial.
Recent academic studies estimate that only 24% of South Africans actively save towards retirement, and for many years, National Treasury has cited that only 6% will retire with sufficient resources for a financially secure future. With medical advances leading to an increase in life expectancy, and with the rising cost of living, financial literacy, disciplined saving and the power of compound interest are three powerful tools for young people saving for retirement.
Financial literacy is the greatest asset available to a young person
Many worry that traditional pension systems may collapse under demographic pressures and that retiring might not even be an option due to the rising cost of living. Some countries are reducing public pension levels for future retirees, putting pressure on the younger generation to bridge the gap through private savings. So how do young people ensure they have enough? And how much is enough?
Financial literacy is the greatest asset available to a young person striving to achieve sufficient and secure savings at retirement. Understanding how financial and retirement products work and appreciating the cost of participating in the products are core requirements for successful saving and investing. Without this, many young people avoid investing simply because they don’t know where to start.
Disciplined saving – saving is a habit, not a once-off decision
You don’t need a lot of money to start saving, what is most important is to just get started with what you can. Saving from the time that you receive your very first income creates lifelong healthy savings habits and is one of the most impactful financial decisions you can make. Various studies show that financial constraints are the primary barrier to young people participating in formal retirement funds. If you learn to live off 95% of your income right from the start, and save the remaining 5%, then setting aside money for a rainy day or retirement becomes routine and alleviates a lot of fears around financial security.
Your future self loves compound interest
Albert Einstein is famously credited with referring to compound interest (in other words, interest on interest) as ‘the eighth wonder of the world’. He explained its immense financial impact with the quote: “He who understands it, earns it. He who doesn’t, pays it”.
Consider the following simple example. If you were to start consistently contributing 7.5% of your salary to a retirement annuity from the age of 25, assuming an average net return of 10%, your investment could grow to provide you with an estimated 75% of your pre-retirement income by age 65. Using similar assumptions, if you were to delay starting to save until age 40, you would need to contribute 19% to get to a similar result. This rate is almost 2.5 times higher – so your future self depends on today’s choices, and the price to pay for not starting to save early enough is a heavy one.
Gen Z leading the way
Worldwide research shows that Gen Z is increasing savings through micro-savings and AI-driven apps that automatically round up expenses to save. These small, consistent savings can make a big difference over time. Unlike older generations, Gen Z tends to favour a non-linear career with multiple jobs, and they attach greater importance to private savings instead of employer plans.
While access to a personal financial adviser might seem out of reach initially, great advances are being made in relation to online access to financial retirement products with guided investment paths. With investment research made available through these online platforms, the financially literate youth can set out confidently on the path to financial security in retirement.
By Linda Kleynscheldt, Head of Actuarial and Product, PSG Wealth