I see on the internet that sliced bread was introduced to the world in the 1930s, in America, of course. For years we’ve had the everyday convenience of just grabbing two slices for the toaster or a sandwich.
To call savings “convenient” may be pushing it. Most of us would rather spend our money on things we need and don’t need. We hope some sort of miracle will sort us out: a windfall or a rich uncle. But reality tells us it will be most inconvenient when a hardship arrives, and we have no savings. And it will be utterly inconvenient to arrive at retirement without enough savings. Because, let’s be honest, even if we have a rich uncle, he’ll look after his children and charities and not after us.
We call two-pot great because it adds convenience to the “inconvenience” of savings. One of the things that used to scare people about retirement savings is how inaccessible the money is.
If you are saving in a retirement fund at work, you can only get access to the money when you resign. People who have done this will tell you that they can pull out their hair that they ever did. At the time, they didn’t realise that it takes years to make up for such a frivolous act. There aren’t miracles that make up for lost opportunities – time is your only friend – time in the investment markets. Time eases out hiccups and when you start earning growth on your growth, that’s when Bob’s your rich uncle, for real.
If you are saving in a retirement annuity now, you can access the money only when you turn 55. This makes for great discipline; you’re almost policing yourself to keep your immediate needs in check to avoid crocodile tears when your retirement eventually arrives.
But with two-pot, you get access to some of your retirement money, both in a retirement fund and in a retirement annuity. It means that the police officer will let you in for a quick visit, once a year, in case you are in a crisis.
We believe you should keep your retirement money for retirement. Full stop. Your financial adviser should make the sums using your current income and map out the journey. How much do you need to save to maintain your lifestyle then? What will be enough to pay for the extra medical expenses waiting in the “golden years”?
But, at least with two-pot, if there is a bump in the road, your money is not in Fort Knox. And you can put it back when you’ve recovered from the crisis. This is also a sum a financial adviser can make – how much you should put back by when.
The greatest secret about retirement savings is how government encourages people to save for it. For every rand you put in, you can get something back from the taxman, depending on the tax rate you normally pay. It’s like getting your savings at a discount. This discount can beat any Black Friday offering. I love discounts, too, but there is no comparison between the discounts on TV sets or fancy shoes if you look at the big tax rebate you can get on retirement money. Plus, you don’t get taxed on your growth. Yes, you will pay tax when you retire, but by that time you should be in a lower tax bracket.
If you are saving at work, a retirement annuity can supplement your savings – and it gives you more flexibility when retirement arrives. Your money in the retirement fund can keep growing while you use the retirement annuity money, or vice versa.
Let’s just revisit why retirement savings is for retirement. We’ll look at an example of three clients who each contributes R1 200 per month to a retirement annuity, and they stick to it for 25 years. They increase their contributions by 10% per year during the savings term.
- Cynthia never withdraws.
- Thabile withdraws once, 50% of the savings component, after 15 years.
- Charles withdraws the full savings component every year.
We round maturity values (at the end of the savings term) to the nearest 10 000 and income to the nearest 100:
Real value and income per month today:
Real value is like a magic mirror that shows how much you can buy today with your future savings amount. We also assume an inflation rate of 6% per year. Each of our investors will receive the income through a living annuity, which means until they die.
We believe two-pot opens a world of opportunity. We’re hoping that in talking about it, people will realise the true value of retirement savings and how it can empower their future selves.