Speaking at Glacier by Sanlam’s recent Public Sector Summit, attended by approximately 500 financial intermediaries, Sanlam Recurring Savings Specialist Elbie Venter highlighted the importance of regular savings, especially in difficult times.
“We know that people resign so that they can access their retirement money to pay off debt,” she said. “But if you resign and have no regular income, then you won’t be able to continue contributing towards your retirement savings or your life cover premiums and other savings. We know that our clients have very little savings, other than funeral plans, so there’s a huge amount of educational work that needs to be done,” said Elbie.
What is saving?
Saving, as we know, is literally setting aside some of your current income for future use. However, it’s important to earn a return on this money so that it grows, and that’s where financial services and insurance solutions play a role.
Elbie explained the relevance of the figure of 480. “If you start working at age 20 and retire at 60, you’ll have 480 pay cheques in your life,” she said. “Salary earners don’t necessarily have the benefits of large capital amounts available to invest as a lump sum, so they really need to make the best possible use of these 480 cheques.
“Saving regularly lets you take advantage of compound interest and it helps to create wealth for the future. But compound interest is a double-edged sword – if you don’t earn it, you’ll pay it on the amount you borrow, or owe on your credit card. To borrow money is to steal from your future self. Interest rates on credit cards are extremely high,” she said.
Elbie highlighted that research in 2020 had shown that 58% of Sanlam Recurring Savings clients in the public sector were stressed about their financial situation, 37% had fallen behind on household bills and 43% had taken out personal loans.
Saving for education should be a priority
“Education is an area where intermediaries can really make a difference,” she said. “55% of South Africans are not saving for education in any way. This means they have to find the funds at short notice when their children start tertiary education. This, in turn, means they can put less away for their own retirement, which could see them potentially becoming a burden on their children later in life. This is a difficult cycle to break. In addition, many people planning for retirement are still looking after an adult dependant and are part of the so-called ‘sandwich generation’. This makes inter-generational wealth creation almost impossible,” she added.
“There’s an enormous opportunity to educate people around saving for the future costs of education,” she said.
Recognise that clients have ‘other’ priorities
Many clients are still paying off student debt or saving for a deposit on a house and may want to defer starting to save for later. “It’s important for clients to beware of what we refer to as lifestyle creep. Once you start working, and start a family, you tend to acquire a bigger house, a bigger car, and when children arrive there will be increased medical costs. At the same time your own retirement date is getting closer and closer. It’s better to start saving earlier, even if it’s a smaller amount. Let compound interest do the work – but it needs time,” said Elbie.
She urged advisers with younger clients to talk to them about saving for their children’s education and not leave it too late.
“Also remember that persons who started working in the public sector later in life, may have less than 10 years’ service, and will therefore only receive a lump sum and no monthly income portion. Issues such as this, open the door to full, holistic planning.”
Many individuals make (and advisers provide advice on) savings and investment decisions and solutions, but many people end up disappointed with the final amount reached. “They need to be working towards a real and very specific goal,” she said.
Elbie urged intermediaries to adopt a goal-based approach to their clients’ savings, so that they can invest to give them the best chance of success. She also stressed the importance of a regular review to make sure the client is on track. “Goals can change, as can circumstances. It’s important to be flexible. Our GOAL MANAGER assists you in defining and managing the goal.”
The investment journey
Elbie summarised the journey you need to walk with your clients as follows:
Start with a goal – There are many different types of goals – education, emergency fund, retirement, healthcare in retirement, lump sum at retirement, or even a personal goal or dream your client has in mind.
Provide guidance – Help your clients define and set up their goals with guidance. Here you would consider elements such as education fees, the number of months’ salary they have left to save before the goal realisation date, net replacement ratios for retirement savings, medical aid and gap cover goals.
Review regularly – This should be done at least annually – to check on the progress of the goal, whether the amount saved needs adjusting, or the monthly contribution updated. Also highlight what has been happening in the markets and why your clients’ portfolios have performed the way they have.
“We’re on this savings journey together,” said Elbie. “We can assist you in managing the advice you give to your client, help you set up the goals, as well as assist with information throughout the relationship. This way your client will always know what the outcome will be – and this can help alleviate the disappointment later on,” she said.
“The main thing is to just get your salaried clients started on their savings journey,” she said.
COVID-19 and the global pandemic caused untold financial distress and showed how unprepared many of our clients are for these types of events. This is true for both risk cover as well as savings.
By adopting a proactive approach to achieving financial security as an individual, and family, your clients can build security for the future and create inter-generational wealth.