One investing decision can cost South Africans R650,000

By delaying investing for retirement by five years, an individual will have R360,000 less to spend in retirement, and if they delay investing for a decade, they will have R650,000 less in retirement. 

This is based on an analysis of returns from a relatively small investment of R1,000 per month by 1nvest portfolio analyst Lungile Macuacua. 

Her analysis showed that investing early, even with a relatively small amount, can yield significant dividends in retirement. 

Macuacua explained that the biggest advantage any young saver or investor has is time, which enables their investments to compound significantly. 

However, many waste this opportunity, as rising living costs and elevated debt levels lead young people to delay their retirement investments. 

This combination of factors also tends to result in young individuals neglecting to take out insurance or medical aid policies. 

“When it comes to building long-term wealth, the most expensive financial mistake many young South Africans make is not investing too little, but starting too late,” Macuacua said. 

She explained that, in investing, the scarcest resource is time, not money. Unlike money, time cannot be earned back later. 

The earlier you start investing, the more your money has the opportunity to benefit from compounding and long-term market growth.

To illustrate the impact of time on investments, Macuacua compared the potential returns of two investors who began saving at different points in their lives. 

Both investors in this example contribute R1,000 per month to a diversified portfolio earning a real return of around 4.8% per annum. In nominal terms, the return is around 9%. 

One investor begins investing at 25 and continues to add to their portfolio until retirement at 65. The other investor waits until they are 35 before starting, and also stops when they hit 65. 

By retirement, both investors will have significantly more money than when they started, but the investor who began at 25 will significantly outpace their peer.

The investor who began at 25 will have R1.45 million in today’s money, while the second will only have R800,000 in their portfolio. 

Thus, a decision to wait just ten years results in a difference of R650,000 at retirement. Waiting five years can reduce retirement wealth by around R360,000. 

Time is money

Starting earlier does not only apply to retirement savings, with the approach yielding dividends in other investment instruments. 

This also does not apply to merely starting investing early, but putting more money to work earlier to let it compound. 

The impact of investing more money earlier can be seen in comparing the outcomes of individuals investing in tax-free savings accounts. 

These accounts have a lifetime limit of R500,000 and have recently had their annual contribution limit raised to R46,000. Previously, the annual limit was R36,000. 

Comparing the returns of two individuals who invest their money at different points within a tax year revealed significant variances in outcomes. 

South African asset management giant Ninety One compared the outcomes of three individuals who invest the full allowance every year. 

Ninety One used the old annual limit of R36,000 to make the comparison as close as possible to the real-world data it has from clients. 

Investor 1 invests the full R36,000 allowance at the start of the tax year. Investor 2 invests R3,000 monthly, and Investor 3 invests R36,000 at the end of the tax year. 

All the investors invested in the Ninety One Opportunity Fund, which has an average annual return of 12.9%, until they reached their lifetime limit of R500,000 in the 14th year of investment.

Ninety One’s analysis showed that investing at the start of each tax year can yield an additional payout of up to 10% in just 15 years.

And for those who cannot commit to an investment of R36,000 at the beginning of each tax year, the data also shows it is still more financially rewarding to initiate a monthly debit order. 

This method results in an additional 5% compared to investing R36,000 at the end of each tax year.

With the annual limit increasing to R46,000 in the new tax year, this principle will still apply, as the earlier one invests, the more time their capital has to compound.