According to an article recently published in The New York Times, there is a new phenomenon gaining momentum: Disillusioned by the current state of the upside-down world, so-called financial nihilists – or those who believe there is no point in investing for tomorrow – are growing in number.
A recent study by Fidelity Investments found that 45% of people aged 18 to 35 are not actively saving. Of this group, 55% said they have put retirement planning on hold. Coming off the back of the pandemic, individuals also cited concerns stemming from Russia’s invasion of Ukraine, political instability, soaring inflation, and global economic uncertainty.
“COVID-19 took so much away from us; travel, experiences and being able to see friends and family. The pandemic made planning for the future seem like a futile task, with many preferring to ‘live in the moment’,” empathises Nomi Bodlani, head of Direct Clients at Allan Gray. “However, even while giving ourselves leeway to embrace ‘the now’, and even if we find ourselves questioning the concept of retirement, it is important to plan for a time when we won’t be able to earn an income.”
Bodlani adds that while the younger generation appears to be throwing in the towel when it comes to saving and investing, the lesson from the pandemic was just the opposite.
“The pandemic reinforced the importance of having a plan for emergencies and having investments built up to act as a buffer during difficult times. This is especially necessary in today’s uncertain world.”
Another trend noted in The New York Times is that the younger generation is giving up on the idea of ever retiring and instead channelling any accumulated investments towards passion projects.
Bodlani says while being a self-starter is something to be applauded given that entrepreneurship is touted to be the answer to South Africa’s high youth unemployment rate, planning for when you are unable to work still needs to be accounted for.
“As South Africans are living longer, it is becoming more likely that young professionals may need to prepare to fund more than 30 years in retirement. For self-starters, it is worthwhile remembering that there are options that allow you to save towards your retirement and focus on getting your passion project off the ground.”
She adds that while you may not want to be tied down by the restrictions of retirement products, such as retirement annuities (RAs), you can look at other long-term products.
“A tax-free investment (TFI) is a good starting point – however, your contributions are limited and would not be enough on their own to see you through retirement. With a TFI, you pay no tax on the interest, capital gains or dividends you earn, or on withdrawals. In addition, it is not as restrictive as a retirement product, and you can access your money if you really need to. But as with everything in life, there are advantages and disadvantages, and so it pays to do your research.”
Should you fund your passion project with your retirement savings?
Bodlani says there are important considerations to think about before dipping into your retirement investment to fund your business.
“You may be tempted to access your retirement investment when you leave your job. However, withdrawing your full retirement savings to fund your small business dreams could set you back more than you think. Not only do you have to start saving again – but you also miss out on the power of compounding. In addition, the later you delay saving for retirement, the more you have to put away down the line to catch up. Our research indicates that saving 17% of your salary is a reasonable starting point for the 25-year-old saver. This amount increases to 42% if you start at 40,” she explains, advising that if you have to dip into the retirement cookie jar, you should take conservatively.
Bodlani adds that another drawback to following this route to fund your passion project is the tax implications. The South African Revenue Service has incentivised preserving your retirement investment with a tax-free allowance of R500 000 at retirement. If you withdraw prior to retirement, the tax-free portion available at retirement will be reduced.
Bodlani says that if you are finding yourself abandoning the idea of investing in your future and giving into the now, here are some pointers to make saving for retirement feel less like a sacrifice:
- Psychologically reframe the large amount you need for retirement: Focus on a monthly amount that you are able to afford and commit to a regular debit order that escalates annually, which will help to make it feel more manageable.
- Reward yourself along the way: Include small rewards in your financial plan when you reach a particular investing goal, which will help you stay committed.
- Consider seeking outside help by seeing an independent financial adviser who can encourage you to remain committed to your financial goals.
“Try to remember that in the context of investing, time, if you have it, is free. The earlier you start saving for your retirement, the less you need to save from your current and future income,” Bodlani concludes.