YOUNG people in South Africa are better at saving than previous generations, but they aren’t investing, a study by Old Mutual has revealed.
Young people, or Millennials — those typically aged between the ages 18 and 34 — were failing to invest for the long term, according to research by Old Mutual Unit Trusts.
The study looked at the financial behaviour of employed Millennials and found that, while seven out of 10 Millennials have a savings account, only four in 10 are investing in pension or provident funds. With life expectancy now at 114 years, according to research by Britannica, the failure to invest could potentially be catastrophic for young people in future.
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.
The Millennial generation preferred not to be formally employed and only start putting money away for retirement late in their working lives. Young people also saved money in formal savings products.
Almost six out of 10 young people surveyed in the study said were they 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.
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 said Elize Botha, managing director of Old Mutual Unit Trusts.
Khaye Gobodo, managing director of Old Mutual Investment Group, said that if no attempts were made by young people to invest, it would lead to the generation over-relying on the state and ultimately creating a drain for the fiscus.
Even if they are saving quite well over time, young people who fail to invest effectively are leaving themselves completely exposed to the risk of inflation — the most significant threat to their hard earned savings.
Reduced long-term investing, coupled with time out of the market, leads to a loss of compound interest in savings for retirement.
Gobodo said unlike the current generation, which was less averse to staying with one employer for their entire life, this generation was not looking to spend time in one company. He said the temptation here was that they were frequently tempted to withdraw retirement savings after switching jobs.
He said that, while retirement seemed far away to someone in their 20s, it was vital that people began investing as early as possible.
“Waiting even a few years before starting to save for retirement can have a massive impact on your final retirement savings,” warned Gobodo.