A retirement annuity or investment plan should cater for the life you want in the future. You need to be certain that you are saving enough and investing wisely to increase your chances of being financially independent during retirement. Currently in South Africa, only 6% of the population is able to retire, while 45% depend on family, 32% are forced to carry on working and 17% survive on a monthly state pension of R1500. What can you do to ensure that you’re on the right side of the curve?
While you are employed you put things off thinking there is always a salary at the end of the month and there is always a tomorrow. People only tend to realize toward the end of their careers that they may not have enough money set aside for retirement. This is no reason to panic. Take a comprehensive look at your financial situation and formulate a practical plan. The action you take now will help to protect your future.
If you are in your late thirties or early forties and you haven’t started saving then try to cut back on your lifestyle expenses and allocate that difference to your retirement investment savings. The alternative is to plan to retire a bit later.
You play it too safe
Investing too conservatively can be a mistake. Equities have outperformed other asset classes over the long term, but tend to be volatile. It is recommended that you have a sizeable chunk of equity exposure in your retirement portfolio. This is true even if you are retired or nearing retirement. Retirement is not the end of your financial plan; rather it is the start of a new one. You may have many years ahead of you therefore your portfolio should be structured for growth.
Balanced funds provide a good solution to many investors. These funds can invest up to 75% in equities, but can also invest in other asset classes to reduce volatility and diversify the risk.
Don’t place all your eggs in one basket
Diversifying is essential to reducing risk. Investing in a variety of assets allows you to receive returns from many sources, regardless of market conditions. Once again, the balanced fund is a good choice for investors looking to invest in a variety of assets and want offshore exposure, but don’t want to build the portfolio themselves.
Don’t switch indiscriminately
You may find yourself tempted to sell your unit trust and buy another if there is a dip in performance or a period of volatility in the market. This is known as switching. Switching could destroy your investment’s value. Timing the market can be extremely difficult and an impulsive response could lead you away from your retirement investment goals. Research your options carefully and pick investments that you are comfortable staying with. Your investment manager needs time to make your money work for you. Only change your portfolio if your financial objectives have changed and stay away from emotional responses to market movements.
Don’t dip into the cookie jar
A large percentage of South Africans take their retirement investment in cash when given access to the money. This means they have to start back at the beginning. Taking the payout harms your accumulated retirement investment savings more than you realize. Not preserving your retirement savings means you have to start over and you miss out on the full potential of compound interest.
A smaller investment made early delivers more than a large investment made later. Thus the first 10 years are more important than the last. For example, consider two people who want to invest R1000 a month. Person A invests R1000/month for a period of 10 years (for a total of R120000 in contributions). Person A then stops, but remains invested for the next 30 years. Person B invests R1000/month for the 30-year period (for a total of R360000 in contributions). Both persons A and B end up with the same total at the end of 40 years.
It is important to know what your goals are. Make the choices that are right for you and try to avoid these common mistakes. If you find the process a little daunting or complex, then consider seeking out the services of an independent financial advisor who will give you unbiased insights into retirement investment and annuity plans that suit your needs.