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Cape Town - Are you on track with your retirement saving, or is your game plan a bit fuzzy around the edges?
Steven Nathan, chief executive of 10X Investments, points out that you need to quantify your goal clearly when you begin saving for your retirement.
“An investor needs to understand how big of a pot of money is needed to be set aside in order to ensure a comfortable retirement. A good place to start is to work towards a minimum replacement of 60% of your final salary, or around 10 times your current annual salary.”
Nathan says there are five fundamental questions that investors need to ask themselves when planning for their retirement:
1. How much do I need to save for my retirement?
If you want to achieve a comfortable level of retirement, you should ideally save 15% of your salary over a 40-year timespan.
And if you are making a start later in life, it's important to increase your retirement contributions to compensate for that.
2. How do fees impact my retirement returns?
A common mistake in retirement saving is to pay fees that are too high.
Do you actually know how much you are paying away in fees – for advice, administration and investment management - every year, and how much this adds up to over 30 or 40 years, after you include the additional return you could have earned on those savings?
The ugly truth is that paying total fees above 1% pa of your investment balance greatly diminishes the likelihood that you will achieve your retirement goal. There is always a cost to investing, but you need to keep it as low as possible.
You should always ensure that you are paying low fees, certainly no more than 1.5% and preferably below 1%. Why? If you can save 1% in fees, your final pension amount would increase by about 30%.
A recent National Treasury study found that if consumers could reduce their fees from 2.5% to 0.5%, they would double their final pension or save half the amount to achieve the same pension.
3. Have I made the right choice?
Choice is not always a good thing. The retirement industry today offers thousands, if not tens of thousands, of investment products. And with each new fund launched, the choice grows – and so do the chances of making the wrong decision.
It's important to look for an investment solution in which your investment is linked to your time horizon. You should own a high equity balanced fund until you have fewer than five years to go before you retire, says Nathan.
At this time, you should reduce the equity weighting each year in favour of defensive investments such as cash and bonds. This can automatically be achieved using life-stage portfolios.
However, if you intend on investing in a living annuity at retirement, you still have a long-term investment horizon and should not necessarily change your investment.
4. Is my retirement investment product simple and transparent?
The reality is that the retirement industry is incredibly complex and it can become tricky choosing the right retirement product. However, it is possible for this to be simpler.
Nathan says simplicity is critical. A standardised, simple product not only improves people's understanding of their fund, but is also more cost effective.
Knowing what you have increases the value of what you have. Knowing what you pay away in costs - and how this impacts on your eventual retirement benefit - is even more important.
For many years, investors never fully understood their benefits. The retirement industry (administrators, asset managers, consultants and life assurers) played their part by disclosing the bare minimum in terms of fees and charges.
It is incredibly important that all fees and details related to your retirement investment are easily accessible and transparent.
“Investors shouldn’t have to be afraid of having to ask their fund manager about any costs that could potentially be reducing their retirement returns,” says Nathan.
5. Is my retirement fund manager underperforming the market?
No matter how smart a retirement fund manager might be, they only have a 20% chance of beating the index when actively managing a fund. “The technical word for this is 'guessing', which is probably not how you’d like your retirement fund to be handled,” says Nathan.
Index tracking protects the investor from making emotional decisions based on past performance or current market trends.
He adds that investors will receive superior investment returns (after fees) with less risk using index tracking funds. Together with low investment fees, this means a return of as much as 60% more over an investment period of 40 years.
An early start is key. “The earlier a person starts planning for retirement, the better. By knowing more, you lose less on your retirement,” says Nathan.
- Fin24
Consider yourself a savings hero? Or just have something on your mind? Add your voice to our Savings Issue:
* Write a guest post
* Share a personal story
* Ask the experts
Steven Nathan, chief executive of 10X Investments, points out that you need to quantify your goal clearly when you begin saving for your retirement.
“An investor needs to understand how big of a pot of money is needed to be set aside in order to ensure a comfortable retirement. A good place to start is to work towards a minimum replacement of 60% of your final salary, or around 10 times your current annual salary.”
Nathan says there are five fundamental questions that investors need to ask themselves when planning for their retirement:
1. How much do I need to save for my retirement?
If you want to achieve a comfortable level of retirement, you should ideally save 15% of your salary over a 40-year timespan.
And if you are making a start later in life, it's important to increase your retirement contributions to compensate for that.
2. How do fees impact my retirement returns?
A common mistake in retirement saving is to pay fees that are too high.
Do you actually know how much you are paying away in fees – for advice, administration and investment management - every year, and how much this adds up to over 30 or 40 years, after you include the additional return you could have earned on those savings?
The ugly truth is that paying total fees above 1% pa of your investment balance greatly diminishes the likelihood that you will achieve your retirement goal. There is always a cost to investing, but you need to keep it as low as possible.
You should always ensure that you are paying low fees, certainly no more than 1.5% and preferably below 1%. Why? If you can save 1% in fees, your final pension amount would increase by about 30%.
A recent National Treasury study found that if consumers could reduce their fees from 2.5% to 0.5%, they would double their final pension or save half the amount to achieve the same pension.
3. Have I made the right choice?
Choice is not always a good thing. The retirement industry today offers thousands, if not tens of thousands, of investment products. And with each new fund launched, the choice grows – and so do the chances of making the wrong decision.
It's important to look for an investment solution in which your investment is linked to your time horizon. You should own a high equity balanced fund until you have fewer than five years to go before you retire, says Nathan.
At this time, you should reduce the equity weighting each year in favour of defensive investments such as cash and bonds. This can automatically be achieved using life-stage portfolios.
However, if you intend on investing in a living annuity at retirement, you still have a long-term investment horizon and should not necessarily change your investment.
4. Is my retirement investment product simple and transparent?
The reality is that the retirement industry is incredibly complex and it can become tricky choosing the right retirement product. However, it is possible for this to be simpler.
Nathan says simplicity is critical. A standardised, simple product not only improves people's understanding of their fund, but is also more cost effective.
Knowing what you have increases the value of what you have. Knowing what you pay away in costs - and how this impacts on your eventual retirement benefit - is even more important.
For many years, investors never fully understood their benefits. The retirement industry (administrators, asset managers, consultants and life assurers) played their part by disclosing the bare minimum in terms of fees and charges.
It is incredibly important that all fees and details related to your retirement investment are easily accessible and transparent.
“Investors shouldn’t have to be afraid of having to ask their fund manager about any costs that could potentially be reducing their retirement returns,” says Nathan.
5. Is my retirement fund manager underperforming the market?
No matter how smart a retirement fund manager might be, they only have a 20% chance of beating the index when actively managing a fund. “The technical word for this is 'guessing', which is probably not how you’d like your retirement fund to be handled,” says Nathan.
Index tracking protects the investor from making emotional decisions based on past performance or current market trends.
He adds that investors will receive superior investment returns (after fees) with less risk using index tracking funds. Together with low investment fees, this means a return of as much as 60% more over an investment period of 40 years.
An early start is key. “The earlier a person starts planning for retirement, the better. By knowing more, you lose less on your retirement,” says Nathan.
- Fin24
Consider yourself a savings hero? Or just have something on your mind? Add your voice to our Savings Issue:
* Write a guest post
* Share a personal story
* Ask the experts
