Money is not worth what you pay for it

Lets talk about money this week.

I don’t know about you, but after fifty years of trying to get to grips with the subject I find myself sadly lacking. Here’s the thing.

In 1992 I was forced to revise all the stuff I had learned about money in business, and since then have been teaching what I learned in the [Crashproof seminar][cp] and the Business Warriors. I thought that was enough. I was wrong.

Most of us do not have enough stored away to live off after we retire. This has become an issue for me of late. A truism in the life assurance game holds that just one person out of a hundred retires with enough to live on. The answer given to us is simple: invest more and invest from the day we start working. That seems to make sense, and we are promised that the magic of compound interest will set us free.

Since I have to stake my life on this advice it makes sense to check it out myself, rather than working with the numbers my earnest salesman is quoting. My problem is that I cannot make the numbers work, no matter how I look at them. Since I am not a registered financial advisor I can not advise you on where to put your money. But I do advise you to ask some probing questions next time you get hit on.

In the past our parents retired on a pension from a large firm. That pension was based on how much they earned in their last few years, and on the number of years they had worked for the firm. My dad, for instance, after 42 years of working for SARS, earned much, much more in the 20 years of his retirement than he ever did while working.

That’s why these pension schemes have mostly been replaced by schemes where your pension is based on how much you save, rather than your final wage.

Here is the problem as I see it. On the one hand, the money you save grows each year. (You save more each year, and each year interest adds a little more to the pile. This happens year after year, and you earn interest on interest.) So, put away 10% of your wage each year from age 18 and by age 65 you will be rich.

On the other hand there is the problem of inflation. Each year the amount of stuff you can buy with your Rand falls a little bit. The Reserve Bank aims for this slippage to be about 4% each year, but we all know it is a lot higher right now. This means that over the same period (65 – 18 = 47 years) that itsy bit of inflation each year will cut into that pile of cash you’re putting away.

So, assuming that you save 10% of your wage from your first day in your first job in 2008, and stay fully employed until 65, and don’t use any of that old age saving fund in the meantime, you can expect to have R15,311,256 when you retire.

That R15,311,256 looks like a heck of a lot of money. Until you look at how inflation eats into it. Your R15,311,256 in 2055 will only buy what R416,734 can buy in 2008, assuming inflation remaining what it is now.

Today that R416,734 will buy a pension of R3394 per month for yourself and spouse, which will increase by the inflation rate each year for the rest of your life. (Unless, of course, you live in Zimbabawe.)

I started to mess with the numbers to see how much I would have to have saved, and how much growth I would have had to get each year, and began to see that it was an almost impossible task. Scary!

Even more scary is that we small band of business brothers and sisters do not save much at all, and our savings depend on the state of our business efforts.

And then I began looking for another way to get to 65 with more than enough to live until 100. That was easy. But here is the problem: Why aren’t we learning this stuff at school?

If you want the answer, REPLY with your story. It’s getting a little lonely up North. If enough folk are interested I will spill the beans next week in a much longer than normal email, because it is a big topic. I will include a spreadsheet with all the maths as well so that you can test my results.