South African millennials — those aged between 18 and 34 — are proving to be better savers than previous generations, yet they are failing to invest for the long term. This is according to recent research commissioned by Old Mutual Unit Trusts into the financial behaviour of employed millennials, which found that while 69 percent of them have a savings account, only 44 percent are investing in pension or provident funds.
Research by Britannica — which indicated that the life span for humans is now at least 114 years, almost double our expected retirement age — coupled with continued failure to invest could be catastrophic to millennials' dreams of achieving financial freedom, said Khaya Gobodo, managing director of Old Mutual Investment Group.
Millennials tend to save money in formal savings products. Almost 61 percent of millennials surveyed 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.
"If no attempt is made to generate real wealth over time through investing, it will likely result in an over-reliance on the state in the future, creating a drain on the national budget, which will be catastrophic for the economy," said Gobodo.
While saving without investing may feel adequate over the shorter to medium term, Botha explained that it just isn't sufficient to secure long-term financial security by saving alone. "Even if they are saving quite well over time, millennials 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," added Gobodo.
This is particularly worrying when considering, for example, that older generations who are currently retiring still do not have sufficient funds. "Despite many of these people having spent most of their working years with one employer, compounding their retirement savings over 30 to 40 years, there is still a significant shortfall," he said.
A generation of millennials, on the other hand, who are not looking to spend much time in one company, may be tempted to withdraw retirement savings, for example, on resignation and lose out on the power of compound interest. On top of this, the transaction costs and penalties they pay to tax for withdrawing before retirement further diminishes the savings they will be left with post-retirement.
Thanks to the power of compound interest, the longer your money is invested, the more time it has to grow — and this is why going beyond saving, by investing, is a great step.