Millennial workers, those who entered adulthood in the early 21st century, are now at a stage where they need to be looking at their retirement seriously in order to maintain their lifestyles in their later years.
With only 6% of South Africans currently being able to retire comfortably, the reality is that with longer predicted life spans and the prospect of weaker investment returns, Millennials will need to save more money over a longer period than their Baby Boomer parents did.
The need to save for retirement is as pertinent as ever, warning Millennials against continuously pushing the matter out. Although we cannot fully imagine the world in 2050, when this generation starts to wane, we can safely predict that there will still be no free lunch. Millennials have a reputation for being reluctant savers, yet they are in far better shape to avoid the many investment pitfalls that tripped up their parents.
The Baby Boomer generation – the first having to secure its own retirement - was poorly informed in comparison to Millennials. Basic financial insights and planning tools were not readily available, certainly not at the touch of a screen like it is today. Millennials have access to a mass of useful resources and retirement products have evolved to better serve their needs.
Unlike their parents, Millennials don’t have to settle for a policy-based retirement annuity (RA) if they are without a workplace retirement fund. Low-cost index funds, for example, only went mainstream around fifteen years ago. These funds deliver superior returns at lower cost than most active managers – some costing less than 1% per annum, with each 1% per annum improvement over a working life improving an individual’s retirement income by some 30%.
One thing that has not changed is the value of time in the market, and that delaying saving for retirement is the most expensive mistake a Millennial can make. For every R10 000 you don’t save at age 25, you have to save R26 500 at age 45 (in today’s money terms, before factoring in for inflation), just to make up for the lost return. And if you don’t start saving until age 45, then instead of saving R10 000 per month from age 25, you have to save R37 000 per month to still retire with the same amount money at age 65.
One way Millennials can add to their savings is to make a top-up contribution to an RA before the tax year ends on 28 February. This is a simple and effective way to reduce income tax, boost savings, and earn compounding tax-free returns for 30 or 40 years. Recent rule changes mean that RA contributions can now be claimed against all taxable income (not just non-pensionable income), and at the much higher rate of 27.5%, (subject to a total cap of R350 000).
Millennials are reminded that the single biggest regret of present-day pensioners is that they did not save more. As a Millennial, you can avoid those regrets. You have the tools and the insight at your disposal, and you have access to products that serve your needs and promise a much higher return. It’s never been simpler or easier to save effectively for retirement, and topping-up your RA is a great way to take advantage of this.
Steven Nathan is the CEO of 10X Investments.