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.
Do you have any advice for saving for your family's future?