While you’re establishing your career, meeting a mate and making a nest, most of us believe that mature money decisions are way off in the future. Few of us give thought to the money mistakes we make as we grow older. Craig Torr, director at Crue Invest, outlines ten money mistakes to avoid in your 30’s.
Spending too much money on the wedding
Many couples are delaying marriage until their thirties when they are more financially secure and have established careers. In their 30’s, couples often cover wedding costs themselves rather than burden their parents who may be short-funded for retirement. The average cost of a wedding in South Africa ranges between R70 000 and R150 000 depending on the number of guests. The total continues to tally, when adding the honeymoon at an average of R30 000 and R25 000 on the rings.
Borrowing R70 000 at an interest rate of 18% to fund their wedding, and paying this debt back over five years, they would effectively spend R106 652 on their wedding. Starting out life together saddled with debt can create enormous tension within the relationship.
Many couples feel pressured by their parents and friends to have a more elaborate wedding than they would have opted for, something they will quite literally pay the price for in the years to come.
Opt for a less expensive wedding that does not leave the bride and groom indebted at the outset of married life. Rather than borrowing money to pay for the wedding, Torr’s advice would be to save towards an affordable wedding even if it means delaying the wedding. Coupled with house, vehicle and retail debt, excessive wedding debt can cause untold stress and anxiety on a newly married couple.
Getting married without talking about finances
Many couples don’t talk about money before their marriage. With the number of blended families on the rise, merging marital finances can be a lot more complicated than figuring out who pays for what. According to Stats SA, 1 in 6 South African marriages will end in divorce, and 65% of marriages include children from a previous relationship. Only 33% of children live with both parents. In 2014, 55.4% of divorces involved couples with children younger than 18.
Couples bring unique circumstances to most relationships: one partner receives an inheritance; one spouse is still studying and requires financial support from a partner; an ex-spouse that needs financial support; children from a previous relationship; financial obligations to an aged parent; the desire of one partner to set out on a business venture; the desire of a mom to stop working to raise children; where one partner is a spender and the other a saver.
Money is one of the biggest sources of marital discord. More than fighting about Rands and Cents, many people enter a relationship with deep-seated, unarticulated fears about money. Even before a couple gets down to the nuts-and-bolts of the household budget, there needs to be some serious discussions around each partner’s relationship with money.
What are their fears?
How do they feel about debt?
What is their attitude to spending and lending money?
Are material items important to them or do they place more value on experiences?
Do they understand the need to invest for the longer-term?
Are they committed to full financial transparency in the relationship?
Making debt a way of life
The thirties is generally the time when young professionals choose to invest in property and take out vehicle finance and, although common, it is important to contain and manage debt.
Knowing their income will increase quite rapidly in the medium-term, young professionals often over-extend themselves with home and vehicle debt. Statistics show that car owners in their 30s and 40s tend to have the highest level of vehicle debt. Debt keeps the buyer on a debt treadmill, paying off yesterday’s expenses with interest. According to the Momentum Unisa Household Wealth Index for 2016, South Africans are spending 21% of their gross income servicing debt. Of this, only 30% is being used to repay home and vehicle loans. The remaining 70% is being used to service consumption loans such as personal loans, overdrafts and credit card debt.
Spending your capital when moving jobs
According to the US Bureau of Labor Statistics (2015), the average worker currently holds ten different jobs before the age of forty, and this number is projected to grow with Millennials who will hold between twelve and fifteen jobs in their lifetime.
Generational experts believe this trend should be viewed as ‘career exploration’ rather than career climbing, with Millennials perceiving it to be socially and culturally acceptable to explore multiple jobs and industries. The downside is that multiple careers moves interrupts the Millennial’s savings progression, making it difficult for them to harness the power of compound interest in favour of their retirement funding.
Coupled with this, Millennials enjoy a longer life expectancy than any other generation prior to them, and could realistically spend 35 to 40 years in retirement. Regular career and job changes will tempt Millennials to withdraw their retirement fund benefits rather than preserve their capital.
This is even more tempting if the Millennial has entrepreneurial ambitions and requires start-up capital. Preserving retirement capital in a preservation fund is a prudent move as it allows the investor one opportunity to withdraw from the investment prior to retirement.
Delaying your retirement funding
Regular career changes, coupled with property and vehicle repayment commitments, provides thirty-somethings with easy justification to delay funding for their retirement until they have more surplus income to spare.
Compound interest is either working for you or against you, and the longer you allow it to work against you by being indebted and not saving, the more difficult it is to catch up. With car, vehicle and retail debt being trademarks of the average thirty-something, it becomes increasingly easy to slip into the habit of living in debt and postpone saving for retirement. Even a ten-year delay in saving will have significant repercussions for retirement saving, with each delay making it increasingly difficult to close the funding gap.
On average, a person will need to earn a post-retirement income of between 70% and 80% of their current income in order to cover their living expenses.
Sanlam Employee Benefits have compiled a simple retirement calculator that allows you to determine how much you would need to save for retirement at age 65. Figures are based on what is saved through traditional retirement vehicles (retirement annuities and work pension funds) and does not include other investments such as property. The calculation suggests that after working for 5 years, you need to have saved 1 x your annual salary. Thereafter:
After 10 years, 2 x annual salary
After 15 years, 3 x annual salary
After 20 years, 4 x annual salary
After 25 years, 6 x annual salary
After 30 years, 7 x annual salary
After 35 years, 10 x annual salary
After 40 years, 12 x annual salary
Significantly, South African investors are permitted to invest up to 27.5% of their taxable income - less any amount that is being contributed towards a pension or provident fund - tax-free into a retirement annuity (up to a maximum of R350 000 per year).
It’s advantageous to invest with before-tax money and income tax and Capital Gains Tax (CGT) are not charged on the investment returns achieved in a retirement annuity. The money that’s invested in a retirement annuity falls outside the investor’s estate and can’t be touched by creditors. It is also excluded from estate duty calculations. So the only people who can benefit from your retirement annuity are you and your family. Investors are encouraged to maximise this tax deduction to reap the benefits of investing with before-tax money.
Insufficient life and disability cover
While young and in the wealth-building process, it is essential to protect one of your greatest assets – your income. Your (and your spouse’s) income allows you to service your debt, enjoy a decent standard of living, and fund your retirement years.
If you were to become disabled or ill and unable to generate an income, it is wise to ensure you have an income protection benefit that would essentially pay you your current level of income, increasing with inflation, until you reach age 65. It is sensible to have enough life cover on your life to ensure that, should you die, your estate can pay-off your home loan and any other debt.
If married, you would naturally want to leave your spouse with sufficient capital to ensure that they maintain a standard of living. As you accumulate more wealth over time, you would need to downwardly adjust your insurance cover, and this would be done at your annual financial review.
According to Stats SA in 2014, the national disability prevalence sat at 7.5% of the population, with disability being more prevalent among females (8.3%) than males (6.5%). The percentage of people with disabilities increases with age. A survey by True South Actuaries & Consultants conducted in 2014 showed that South Africans are under-insured for disability with 60% of people not having disability cover in place. As a result, income earners are hard hit when disability strikes, whether permanent or temporary.
Investing too conservatively
If you begin investing at the outset of your career, you have a very long investment timeline and should not be too conservative in your long-term investing. Accordingly to Laura Carstensen, Founding Director of the Stanford Centre on Longevity, the old model of retirement investment doesn’t work anymore.
Through most of human existence, life expectancy was somewhere between 18 and 20. By 1850, the life expectancy in the US had reached 35. By 1999, the life expectancy had reached age 77. It gained 30 years in one century which is unprecedented. More years were added to average life expectancy in the 20th century than all the years added in all prior millennia of human existence. In the table below, a 65 year-old man today has a 50% chance of living until age 87. A woman has a 50% chance of living to age 90. A married couple have a 25% chance of one partner living to age 98. If they retire at age 65, they would need to have saved enough money to cover between 70% and 80% of their current living expenses for a period of 33 years!
65-year old man
65-year old women
65-year old couple*
*At least one surviving individual
Source: Society of Actuaries PR-2014 Mortality Table projected.
Thankfully, living longer also means a longer investment timeline for compount interest. Many Millennials shun the idea of a traditional retirement at age 65 with a view to working for as long as possible, and this is great news for their retirement funding. With an extended investment horizon, 30-somethings can afford to take more investment risk and should be encouraged to do so.
Spending retirement funding on education
Our children need love, guidance, shelter, food, clothing, medical care and an education. According to a survey conducted by the Centre for a New American Dream, a teenager will ask nine times until the parent eventually gives in, but buys the desired product. The art of delayed gratification is a skill a child will use in every aspect of their life, whether it is working hard for the qualification that they want, or putting in extra hours and effort for the promotion they desire, or training hard for a race that want to compete in.
According to a 2014 survey by American consumer analyst, Piper Jaffray, teenagers are spending most of their money on clothes and food, with clothes making up 21% of their total spend, and food at 20%. Electronics account for 6% of their spend, video games at 7%, shoes at 8% and music at 6%. His research also shows that most teenagers are still getting their money from their parents.
Prioritising children’s education over retirement funding
As parents, we want to ensure that our children receive the best possible education. Their education should not be prioritized at the detriment of our own retirement funding.
It’s wise to ensure that you are in a stable financial position by the time your child reaches tertiary education age to finance or stand surety for any potential student loans.
Not drafting a will
Anyone who has assets and/or minor children should draft a Will. People don’t have a Will for many reasons: their estate is not large enough to warrant it; there is a ‘good-understanding’ between your children as to how the estate should be divided.
Dying intestate, or without a Will, is not ideal because it means that certain unintended beneficiaries may inherit from your estate. The Master of the High Court will appoint a curator to take care of your estate, and any assets left to your minor children will go to the Guardians Fund where they will be administered by state authorities until your children are old enough to inherit. The state will also appoint a guardian to take care of your children, and it may not be the person you would have chosen.
Although anyone can draft a Will, a Will must meet certain legal requirements in order to be deemed valid. Simple errors such as allowing a beneficiary to your Will to sign as a witness can result in him being disqualified from inheriting. The drafting of a Will allows you to appoint your own executor who will be responsible for winding up your estate and distributing your assets to your nominated heirs. It is advisable to appoint someone with sound financial and administrative skills, and who you believe has your best interests at heart.
A Will also allows you to nominate legal guardians for your children. You are able to set up a testamentary trust in terms of your Will in which to house the assets bequeathed to your children. This trust will be managed by trustees nominated by yourself in the best interests of your children and until such time as they are able to manage their own money.
Issued by Crue Invest