Financial Planning for the Youth

South Africans have access to savings vehicles that unlock wonderful tax benefits. Treasury offers these tax incentives to encourage people to save more, because in reality, only 6% of South Africans can afford to retire. If you are not benefiting from these tax incentives, you are losing out. Your financial goals should enable your financial planner to identify the appropriate savings vehicle for every financial planning need you might have.
Often investing is not considered a priority. Those who save often, save what is left after spending, instead of spending what is left after saving. I believe you should pay yourself (or your future self) first.

By way of a simple example, I would like to illustrate two very important principles:
What it takes to prepare for retirement.
Why time should not be wasted.
For the purposes of this exercise, we assume that the chosen investment delivers a return of inflation + 6%. Let’s call this 12% annual growth, based on my inclination to assume inflation to be around 6% annually.

If an individual has a present value income (and income need) of R25 000 per month, what percentage of this person’s gross income needs to be invested in order to enjoy a retirement of 25 years (65 – 90) in which the retirement income keeps track with the value of R25 000 in today’s terms? The answer is set out in the table below:

Age: Savings amount: % of gross/taxable income:
25 R2 675 10,70%
30 R3 900 15,60%
35 R5 425 21,70%
40 R7 700 30,80%
45 R11 350 45,40%
50 R17 750 71,00%

*Take note: By assuming the individual’s income will escalate annually with 6%, we also assume that his contributions to the retirement fund will escalate at 6%.

Whether this person starts saving at 25 or 45, he is planning towards the exact same goal – to retire at 65 with an income equal to what he is used to. It just seems more realistic for a 25 year old to save 10,7% of his gross salary, than it would be for a 50 year old to save 71% of his gross salary.

Advisers often say: “It’s never too late to start.” However, I urge you to carefully consider such a piece of advice, because it can be just as false as it is true. Start saving early.

By autusco

Saturday, June 6th, 2015

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