On a flight over the weekend I happened to be sitting next to an independent financial adviser who was telling me about a new client of his. She is retiring next month and will be cashing in her retirement annuity (RA).
She took out the RA 28 years ago and contributed R50 a month with no escalation.
Her total contributions were R16 800 and next month she will be receiving R630 000 from that RA.
That works out at an average return of just less than 20% per annum and her contributions account for less than 3% of her total lump sum! Talk about getting your money to work for you.
Even in a lower growth environment it is expected that your total contributions will only make up about 15% of your total retirement lump sum if you contribute for 25 years — the rest is purely growth.
The growth effect
I always find these stories inspiring because it reminds us that investing is not rocket science — it is not about guessing the next market move or whether the JSE will be at 40 000 at the end of the year, it is about how much you save and for how long. It also shows us that the longer we save, the less we actually have to save because of the power of compounding returns.
Recently I received my son’s Satrix statement. I have written about this before (see related articles: “Secret investment recipe”) but it still stuns me when I see the balance every six months.
I have been investing R200 a month for about the last nine years (I increased it to R300 a few months ago). When I wrote an article about it in May last year it was worth R35 000 and my contributions since then have been R2100. The statement I received showed it at R46 000.
Bit by bit our monthly savings keep growing and eventually become a considerable lump sum.
Babies and bath water
The adviser’s story also said something about the so called “old age” RAs that we were all told to abandon because they were such a rip-off.
I am sure this particular woman was very glad she never followed that bit of advice. What was lost in all the anti-RA arguments was that if left to maturity those RAs were actually not that expensive — the problem came when you stopped contributing as the costs for the full term would be deducted.
The new RAs are far better in a world of significant flux where people change jobs like they would hats, but it is still a reminder to assess our finances based on our own needs and financial plan so that we do not end up throwing the baby out with the bathwater.
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