How to catch up on your retirement savings
For many South Africans who were already finding it difficult to save for retirement, Covid-19 has created additional financial pressures which may take years to overcome.
If you stopped contributions to your retirement annuity, or took a payment holiday on your pension or provident fund, you might be worried about the shortfall created, and how you’re going to catch up.
Stop worrying and take action to avoid retiring with insufficient funds. There are many ways to contribute to your retirement, from employer and employee contributions to pension or provident fund, monthly contributions to a Retirement Annuity or a tax free savings account.
With many people having a reduced income due to the economic ramifications of Covid-19, it might be impossible to contribute a large monthly amount to catch up while having concerns such as debt to pay, but I recommend starting with your budget. This will aid you not only by freeing up extra funds to catch up your retirement contributions with, but could also create some peace of mind with an opportunity to pay debts off faster or save some discretionary money.
There are many reasons why it is important to follow a monthly budget. Besides reducing stress levels by keeping an eye on your spending habits, it also allows you to track your debts, finding opportunities to top up emergency funds or save extra towards your retirement. A budget goes hand-in-hand with setting and achieving financial goals.
A budget does create an additional administrative burden and requires time to update. I have my budget on an Excel spreadsheet and update it monthly when making EFT payments.
Costs for entertainment, groceries and petrol are variable in nature and change each month. You might end up not using all the funds set aside for these variable costs. Adding these leftover funds at the end of the month to your savings is a good habit to inculcate. The immediate impact might seem small but over time will make a positive outcome to both your retirement and the development of a savings mind-set.
When you are able to free up some money each month, start automating your savings. Instead of having a variable amount go towards savings, set up an automatic contribution, where you "pay yourself first”. Set up an automatic debit for your retirement savings and you'll grow these funds without having to think about it.
One of the most important decisions you can take to help make your retirement comfortable is preserving your retirement funds when changing employer.
When starting new employment or if you are coming out of a payment holiday, try matching your employer’s monthly contribution toward your pension or provident fund, or if on a total cost to company structure, start on the maximum employee contribution percentage. By doing this as well as automating your savings, you get use to contributing those amounts and could potentially have a larger nest egg at retirement.
Remember that life happens, and your budget might come under strain – many of us have experienced this during the pandemic. If you have been going through a difficult financial time, it is time to reassess and ask yourself, what in your budget is necessary and what is actually a luxury?
It is never too late to start sorting out your finances, but the earlier you start, the better, and more achievable, the outcome will be.