Although the investment arena may appear complicated, highly regulated and jam-packed with jargon, there are a set of underlying fundamentals when it comes to preparing for one’s retirement that are universally true and indisputably sound. With only 6% of South Africans being in a position to retire comfortably without adjusting their standard of living, it is now more important than ever to address one’s retirement savings and to make amends where necessary. Here are our ten tried-and-tested tips for retirement planning.
1. It’s never too late to start
As in the case of diet and exercise, it is never too late to start saving for retirement. Whilst the consensus is that one should start saving with one’s first pay cheque, the reality is that this very rarely happens in practice. Retirement goals are very seldom top-of-mind for any 20-year old embarking on their career, and retirement funding is often delayed until later in life. In these instances, the ancient Chinese proverb rings true: “The best time to plant a tree was twenty years ago. The second best time is now.” If you didn’t start with your first pay cheque, the second best time is now.
2. Set retirement goals
No financial planner can provide investment advice if one hasn’t first determined one’s retirement goals. The development of a retirement plan requires a full understanding of when you wish to retire, where you would like to live, what income you would need to live comfortably and what capital outflows you anticipate during retirement. The more detailed your retirement plan is, the greater chance you have of being able to achieve it. In the timeless words of Lewis Carroll, “If you don’t know where you are going, then any road will get you there.”
3. Spread your risk
Not diversifying one’s investments is possibly the greatest risk to one’s retirement funding. Many entrepreneurial-minded people spend their careers building up enormous equity in their businesses, personal property portfolios or even gold, with the belief that this equity can easily be realised at retirement. However, as the axing of Minister Nhlanhla Nene demonstrated to us, the idiosyncrasies of politics and economics can have unforeseeable effects on businesses. As a general rule, Easter is the only time of the year when it’s perfectly acceptable to put all your eggs in one basket.
4. Insist on transparency
Old-school, insurance-based retirement annuities and endowment policies were notorious for their lack of transparency when it came to upfront commissions, investment fees and penalties. Thankfully, however, we now have a new generation of fee-based financial advisors and a hugely reputable range of excellent investment houses who provide full transparency when it comes to advice fees, investment fees and targeting investment returns. Insist on unequivocal transparency when investing.
5. Preserve your capital
For many people transferring between jobs, the temptation to cash out their retirement funding is all too great. The reality, however, is that any withdrawal from accumulated savings interrupts the power of compounding interest, and moves the investor ‘back to begin’ when it comes to saving for retirement. As soon as retirement funding is cashed out, the investor places himself under future pressure to recoup and continually play catch-up. Preservation funds are excellent safe havens for one’s accumulated retirement capital.
6. Use the tax deductions
New generation, unit trust-based retirement annuities are excellent retirement funding vehicles – especially for those who are self-employed, who do not receive pension or provident fund benefits from their employer, or who earn a significant amount of non-pensionable income and want to boost their retirement funding. With effect from 1 March 2016, investors will qualify for a tax deduction on up to 27.5% of their taxable incomes towards a retirement annuity, which is a significant tax deduction that should not be ignored.
7. Don’t under-estimate your longevity
We may not know how long we will live, but we do know that we are living longer than any generation before us thanks to enormous advances in science and medicine. In general, whilst women tend to live longer than men, this is not normally reflected in their retirement funding. Many women remain hopelessly under-funded for retirement even though they are more likely to outlive their male partners. When developing your retirement plan, consider the reality that you may well live to age 100.
8. Buy and hold
Driven by fear and greed, too many investors pull their money out of the stock markets when share prices seem poised for a protracted fall in the hopes of reinvesting when prospects improve. The inherent problems in this approach are that (a) timing remains a gamble and (b) there’s a massive cost associated with trying. By adopting and sticking with a buy-and-hold investment strategy investors can take advantage of the power of compounding, or the potential of invested money to make more money. It’s for no small reason that Albert Einstein said that “compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
9. Don’t bank on winning the lottery
Many under-funded retirees are victims of the sincere belief that their retirement funding will be taken care of by winning the lottery, or some other such gamble. The reality is that one’s chance of winning the South African Lotto is 1 in 13,983,816, which means that you have to buy 13,983,816 tickets to be sure that you will win this prize – at a total cost of R48,943,356. Take a raffle ticket, for sure, but don’t gamble with your retirement.
10. Just do it
Thankfully, we operate in a very well-regulated financial services environment which provides an excellent array of retirement funding vehicles for us to choose from – including the newly implemented tax-free savings accounts. Although rife with complexities, any fee-based financial planner worth their weight in gold will be able to provide you with succinct advice in layman’s terms to ensure that you reach your goals.
Remember, the worst thing you can possibly do is nothing at all.
Have a fantastic day!