While South African millennials – individuals aged between 18 and 34 – are proving to be better savers than previous generations, they are failing to invest for the long term.
This is according to recent research commissioned by Old Mutual into the financial behaviour of employed millennials, which found that while 69% of millennials have a savings account, only 44% are investing in pension or provident funds.
Khaya Gobodo, Managing Director of Old Mutual Investment Group, refers to research by Britannica, which concludes that the life span for humans is now at least 114 years, which is almost double our expected retirement age. This coupled with continued failure to invest, could be catastrophic to millennials’ dreams of achieving financial freedom.
“This phenomenon is ascribed to among other things; understanding disease, improved nutrition and technological advancements. In South Africa, there is an existing shortfall in retirement savings, which in itself is a significant opportunity for the financial services industry,” he says.
From our research, we see that individuals in this generation prefer not to be formally employed and only start putting money away for retirement late in their working lives. In addition, millennials tend to save money in formal savings products. Almost 61% of millennials surveyed were saving money in a bank account. However, bank accounts are seldom able to deliver the real growth required to beat inflation, whereas, equity-based investment vehicles can protect and enhance the buying power of your money over the long-term.
Elize Botha, Managing Director of Old Mutual Unit Trusts, echoes Gobodo’s sentiment. “Unlike saving – which is setting money aside to meet short-term goals – investing builds sufficient wealth to secure a second source of income to one day hopefully replace your salary, which is the ultimate goal of financial freedom.
“If no attempt is made to generate real wealth over time through investing, it will likely result in an over-reliance on the state in the future – creating a drain on the National Budget, which will be catastrophic for the economy,” says Gobodo.
While saving without investing may feel adequate over the shorter to medium term, Botha explains that it just isn’t sufficient to secure long-term financial security by saving alone, “Even if they are saving quite well over time, millennials who fail to invest effectively are leaving themselves completely exposed to the risk of inflation – the most significant threat to their hard-earned savings.
Gobodo adds that, “Reduced long-term investing coupled with time out of the market, leads to a loss of compound interest in savings for retirement.” This is particularly worrying when considering that older generations who are currently retiring still do not have sufficient funds. “Despite many of these people having spent most of their working years with one employer, compounding their retirement savings over 30 – 40 years, there is still a significant shortfall”, he says.
A generation of millennials, on the other hand, who are not looking to spend much time in one company may be tempted to withdraw retirement savings, for example, on resignation and lose out on the power of compound interest. On top of this, the transaction costs and penalties they pay to tax for withdrawing before retirement, further diminish the savings they will be left with post-retirement.
Thanks to the power of compound interest, described by Albert Einstein as one of the most potent forces of nature, the longer your money is invested, the more time it has to grow. “Waiting even a few years before starting to save for retirement can have a massive impact on your final retirement savings,” warns Gobodo. He reminds millennials that while retirement may seem far away to someone in their twenties, it is vital that people begin investing as early as possible.