Recently, a financial advisor invited me to present to a group of Government Employees’ Pension Fund (GEPF) retirees in Soweto. He wanted them to be properly briefed on the principles underlying the construction of an investment portfolio geared to their specific risk profile and goals.
It was a great discussion, but it demonstrated how important it is to take control of your retirement planning early on.
It’s very important to understand that being a member of a pension fund, even a blue-chip one like the GEPF, doesn’t automatically mean your dream retirement is secure.
Pension funds cater to a large number of people, and so can only offer generic retirement saving solutions.
It’s up to the individual member to take the necessary steps to ensure his or her desired retirement lifestyle is in place. Ideally, then, you should lose no time in ensuring that your retirement saving is on track.
One word of warning: many of the issues are very complex, so working with an experienced and independent financial advisor is the smart thing to do.
These five questions will act as a useful guide:
What are my retirement goals?
You have to understand in detail exactly what level of income you require when you retire.
You will also need to decide whether you also want to leave money to your heirs, or just to provide for your own future and that of your partner.
All of this will influence what percentage of your capital you can use for income, and thus the amount of capital needed.
Does the existing pension scheme enable me to meet my goals?
Once you know what you will need, you must assess whether what you have in place is sufficient.
It’s very likely that additional saving vehicles will need to be put in place, along with additional life cover. These first two questions need to be revisited regularly as circumstances change.
On retirement, should I remain in the pension fund or structure my own investment portfolio?
In some cases, taking advantage of the GEPF’s income generation schemes makes sense, but very often retirees will want to manage their hard-earned investment as a whole, especially if they have extra savings vehicles.
Is my investment portfolio structured correctly?
Choosing the right mix of unit trusts to meet your specific goals is extremely complex, even for financial advisors—for example, there are more than 1200 South African unit trusts, and many thousands more globally.
The Financial Services Board’s forthcoming Treating Customers Fairly regulations will compel financial advisors to provide certain levels of expertise in this area.
Issues to consider here would include the effects of inflation and achieving the right mix between investment types in line with your strategy and goals as established earlier.
Is my financial advisor truly independent?
If you are going to manage your portfolio effectively, it’s best that your advisor is not tied to any particular investment houses, as this will limit his or her choices, and so could mean a less-than-optimal recommendation.
Being a member of a good pension fund is a great start, but it’s unlikely to be a complete solution.
Assuming responsibility for the quality of your retirement will mean working with a truly independent financial advisor backed up by a reputable asset consultant—and you can’t begin early enough!
*Alex Funk is head of asset consulting at GCI.