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This is according to Old Mutual Investment Group Strategist, Rian le Roux, speaking at the 2017 Old Mutual Savings and Investment Monitor briefing today, who warns that the decline of South Africa’s already low savings rate holds dire consequences for the long term financial health of many South Africans.
The harsh reality is that by spending more than they earn many households are not accumulating enough of a financial nest egg to finance future liabilities, such as their retirement.
“Look out for the cliff,” he cautions. The cliff refers to the inevitable drop in income and living standards for most people at retirement. “How steep this cliff will be is entirely dependent on how well people have provided financially for this day,” he explains.
Most people maintain living standards that are too high during the working years, causing a major cliff at retirement. “A less lavish lifestyle during your working years can mean much less of a cliff at retirement,” he says.
“The weak economy, increases in personal taxes, and rising youth and elderly dependency ratios are making it even harder for households to save, let alone save more. And just as it is becoming more difficult to save, lower investment returns are making it imperative that people actually do just that: save much more,” explains Le Roux. “This developing financial landscape will place an even bigger financial squeeze and strain on households.”
The collective savings of a country play a major role in bolstering the national economy through financing investment in social and physical infrastructure. Le Roux states that a shortage of national savings for investment spending increases dependency on foreign financing to cover the shortfall.
“The issue is that when there’s a drop in foreign investment, and domestic savings remain low, investment in physical and social infrastructure inevitably declines too. This is precisely what is playing out at present, as fixed investment fell from 20.4% of GDP in 2015 to 19.6% in 2016 and national savings declined from 16.3% of GDP to 16.1%. If this trend continues over the medium term, it will further undermine the already weak performance of our economy.”
The weak economy is putting considerable pressure on government finances, leading to higher taxes that make it even more difficult for people to save. “Low savings lead to low growth, which leads to even less saving, creating an ongoing vicious cycle,” says Le Roux. “All of this is currently being aggravated by policy uncertainty and concerns over political and socioeconomic stability.”
Longevity is another issue that is not adequately factored into many people’s personal financial planning. “Healthier lifestyles and ongoing medical breakthroughs mean that people live longer, with many actually outliving their retirement funds and forced to become dependent on others.”
It is not surprising that the 2017 Old Mutual Savings and Investment Monitor, released this month, shows that 66% of our working metropolitan households do not feel confident in the SA economy.
“We urge South Africans to empower themselves by reviewing their financial situation and adjusting their spending decisions accordingly. Adjusting your lifestyle now could prevent financial problems later in life,” he says.