High taxes, particularly hidden taxes, have reduced your ability to save, so you must invest smartly to retire right, Rian le Roux, head of economic research at Old Mutual Asset Managers, told the Personal Finance/Old Mutual Retire Right seminars held recently around the country. The topic of his presentation was "How will the economy affect your retirement?"
It is becoming increasingly difficult to retire with sufficient money. In order to retire right, you must acquire more money management skills and better savings habits, and plan properly, Rian le Roux, head of economic research at Old Mutual Asset Managers, says.
The first step is to establish how much money you will need for retirement. This will depend on a number of factors:
- Inflation - your worst enemy. At five percent inflation, the buying power
of R1 will be reduced to 46c after 15 years and 28c after 25 years; and at 10 percent inflation, the buying power of R1 will be reduced to 20c after
15 years and seven cents after 25 years;
- How long you will live;
- How many dependants you have; and
- Unexpected setbacks, such as no longer having your medical aid subsidised
in retirement.
Ask yourself the following basic questions to establish if you are building up sufficient assets:
- Do you save enough? and
- Do you get good after-tax investment returns?
Le Roux says macro-economic factors - particularly inflation - will affect your ability to retire right, your ability to save and your investment returns.
South Africa is in a perennial state of economic structural change. The 1960s were the boom years; the 1970s were the start of international isolation, but the surge in the gold price masked the underlying problems; the 1980s was the crisis decade, with economic growth stalled by acute instability, isolation and rampant inflation; and the 1990s were a period of transition and deep structural change, with South Africa rejoining the world economy following the lifting of sanctions, the easing of exchange controls, the cutting of import tariffs, the return of controlled spending by government, falling inflation, improved growth but huge job losses and the advent of "package people" who were laid off prior to retirement.
For individuals, the most important development of the 1990s was that South
Africa had to compete on world markets. In order to be competitive, companies had to provide cheaper goods. The only way to do this was to save
on labour costs. This resulted in large-scale retrenchments, and companies no longer carrying liabilities in form of pension funds and medical schemes. More people are now dependant on fewer wage/salary earners.
Retirement planning has been affected. South Africa's total wage bill has plummeted, reducing savings levels from 11 percent of after-tax income in
1988 to four percent last year.
The low level of savings has been aggravated by a rising tax burden, with an extra R122 billion being collected (three percent of total annual income), despite the drop in individual income tax brackets.
The tax position has been made worse by "hidden" taxes, which include the need for greater spending by individuals on education, medical care,
security and general inflation. In 1987, five percent of after-tax income was spent on health and education. It is now more than 10 percent and rising.
Le Roux believes the worst of the structural changes is probably over, but warns not to expect too much relief. Personal income tax may fall slightly, but we may get new taxes and the overall tax burden will remain high.
The consequence is that if we are saving less, we need better investment returns, but investment returns have also deteriorated.
Average investment returns on the JSE Securities Exchange over the following periods have been:
70/7980/8990/9495/2000
Shares13.5%20.5%17%8.5%
Inflation10.3%14.9%13.6%7.4%
Real returns3.2%5.6%3.4%1.1%
Le Roux says investment market conditions have changed. Before 1990, rising
and falling markets equally affected most sectors (for example, mining, financial) of the share market. But since 1990, there have been huge differences between the performances of the various sectors. This is also a result of structural economic changes.
In the 1990s there were a number of popular "easy-to-get-sucked-into" speculative bubbles, such as small companies. The bubbles all painfully burst, with many people losing lots of money.
"You had to be very clever over the past five years to pick the right sector. There was no rising tide that lifted all boats. Being in the right sector was crucial and it was easy to make huge mistakes," Le Roux says.
Foreign investments, however, did wonderfully - thanks to the continuous collapse of the rand.
Most people are asking: Will investment returns improve?
Le Roux says they should, because much of the painful restructuring of the economy is behind us, and there are good prospects for sustainable economic growth and a general rise in investment markets.
But investors need to be aware that more structural changes may be on the way, as well as new taxes, such as capital gains tax, while making the
right investment decisions may remain difficult.
The days of earning substantial returns on foreign investment are over. Although the rand remains a fundamentally weak currency, the government is slowly closing the foreign exchange window and we could be in for a protracted period of a more stable rand. The rand will continue to
depreciate, but not at the same rate as it has until now.
The reality for individuals planning for retirement is that:
- Nobody cares about your retirement but you;
- We are saving less and less, because the government is taking more and more;
- Investment returns have been poor over the past few years;
- Your worst retirement enemies are inflation and tax;
- Your biggest risk is that you do not start saving for retirement early
enough and retire too early; and
- Inflation will come storming back.
The best approach to ensuring you retire right is:
- Save as much as possible;
- Don't take chances with your investments;
- Diversify your investments;
- Give your money to reputable money managers who have re-sources and
experience. More people have lost retirement funds by giving their money to non-professional managers than from any other
factor; and
- The closer you are to retirement, the less risk you should take.