Cape Town, 9 December 2014: In today’s economic climate, South African families often find themselves between a rock and a hard place when making decisions about saving for the future.
What should you save for first? Your children’s education and then retirement?
Or vice versa.
In the view of Danelle van Heerde, head of advice processes at
Sanlam Personal Finance, one financial priority should always take precedence –
saving for retirement.
"Many people delay starting to save for retirement, believing it is more important to put away money for their children’s education first. They think they will be able to catch up on retirement savings later, once their children have started working. Some people even believe that, with a good education, their children will be able to look after them in their old age," Van Heerde says.
But in her view, retirement comes first – and here’s why:
1. You can’t borrow for
retirement. You can however,
borrow for your children’s education, normally at very good rates. There are
also other options available, including bursaries.
Encouraging your kids to take a gap year to earn some money and experience the
world of work before they start their studies may also be a good idea. This
will also give them a better idea of the career direction they wish to pursue.
2. Your children are not your retirement fund. "We are already the 'sandwich
generation'. Many people are providing financially not only for their children,
but also for their parents, who did not save adequately for their own
retirement. And you will in all likelihood live longer than your parents
will. Do you really want to place such a heavy financial burden on your
children, who will have their own families to look after?" asks Van
Heerde.
3. You need to let compounding
perform its magic. Compounding has been called
the eighth wonder of the world. The earlier you start saving for retirement,
the more your money will grow exponentially until the day you retire.
"Our rule of thumb is that if you start in your 20s, you will need to save
at least 10% of your monthly salary to enjoy a pension of 60% of your final
salary at age 65. This figure increases to 15% if you start in your 30s,
however, and 20% if you only start putting money away in your 40s."
4. People are having children
later in life. If you start your
family in your late 30s, your children will probably be taking their first
steps into the world of work at a time when you want to retire.
It will place a huge burden on them to have to look after you when they may
themselves not be earning very much yet.
5. You need to set an example
to your children. It is crucial that
your children start saving for their own retirement from the day they receive
their first pay check.
The best way for them to learn this important lesson is by following your
example. If you have not made retirement savings a priority, be open about your
mistakes and explain what you should have done and why.
"Saving for the future means making choices and creating a
balance between competing financial demands," says Van Heerde.
"Retirement savings always come first, and if you have money to spare
after this, you can put some away for your children’s education. A professional
financial adviser will be able to work out how much you will need in
retirement, and structure an investment plan accordingly," she concludes.
For more information, visit sanlam.co.za,
view Sanlam’s online media centre here or use SPF’s
handy financial calculators here.