Covid and lockdown has up-ended our lives on many fronts. However, for some of us that have been fortunate enough to avoid a heavy financial hit, there could also be some positives - such as reduced household costs because we’re still going out less, travel is complicated and remote work continues for many of us, which means reduced spend on petrol and car maintenance.
As July national savings month comes to an end, Ncumisa Madinda, Executive for Member Solutions at Momentum Corporate, says it’s the perfect time to tally up your monthly Covid-related savings. It may be a lot more than you think. Rather than splurge on online purchases or take-aways, put it to work for your dreams and future.
Are you saving enough for retirement?
When you retire one day, you will no longer earn an income. This is why we save for retirement, and need to use our savings to buy a retirement income, usually referred to as a pension or annuity.
Madinda says that there some guidelines about how much you need to save to buy a pension that will allow you to maintain your standard of living during retirement. Many say you should save enough so that you can afford a retirement income of around 75% of your last salary just before you retire. This percentage is called your income replacement ratio. So, if you’re earning R10 000 a month just before you retire, you need to have saved enough to buy a pension that will pay you R7 500 per month.
“The sad reality is that most of us are only saving enough to reach a much lower income replacement ratio,” says Madinda. “This means our retirement income will be a lot lower than our salary and we may need to make some big lifestyle adjustments, or risk running out of money during retirement.”
Madinda says that a smart move is to put those Covid savings to work for your future and channel them towards your retirement savings.
“Let’s say you count up your Covid savings and they come to R500 a month, or R16 a day. A 35-year old who is due to retire at 65 will find that this relatively small additional investment can increase to a much larger amount of R1,031,422 by retirement, thanks to compound interest (10% per annum),” says Madinda
Did your employer take a contribution holiday recently?
Madinda explains that Covid-19 has created cash flow pressure for many employers. “This is why the FundsAtWork Umbrella Funds from Momentum Corporate allowed employers who applied for contribution relief to put retirement contributions on hold for an agreed period. Many other retirement funds followed a similar route. However this pause in contributions could impact on members’ already low income replacement ratios, unless they catch-up on the missed contributions by making additional voluntary contributions.
For example, a 35-year old due to retire at 65, who was on track to achieve an income replacement ratio of 50%, will find that a 12-month contribution holiday has reduced their income replacement ratio to 48.6%. But if they increase their monthly contribution by just 2%, and keep it at this level until they retire, their retirement income ratio increases to nearly 54%,” says Madinda.
If your contributions were put on hold for any period due to the pandemic, it would be a good idea to seriously consider using some of your Covid savings to catch up by ramping up your retirement contribution.
Less for the tax man, more for your retirement
Madinda says it’s important to remember that the contributions you pay to your retirement fund are tax deductible, which means the contributions are deducted from your income before calculating the tax due. So increasing your contributions not only helps you save for more retirement, but also means you pay less tax every month.
She continues, “Those who are fortunate to belong to a retirement fund that pays them financial rewards based on their health status can use the rewards to boost retirement savings.
Plus, if you speak to a retirement benefit counsellor or financial adviser, and feel confident that your retirement savings are on track, you could consider a shorter-term savings goal, like taking the family on a holiday when lockdown is over. Some retirement funds like the FundsAtWork Umbrella Fund give their members access to rewards programmes, and offer seamless ways to channel their rewards to attractive short-term savings options.”
Madinda concludes, “As South Africans, we have the knack and grit to rise above challenging situations, and Covid has certainly been challenging. Let’s look at how we rise above our current set of difficulties and make them work for us, by using our Covid savings to bring our future dreams to life.”
PERSONAL FINANCE