2 December 2012
Beware of being conservative when saving for your retirement. Equity markets have historically delivered returns of around 7% after inflation.
This is now not the case. It serves as a reminder to make sure you are making sufficient returns without necessarily taking on more risk. People invest too conservatively thus not allowing funds to grow both pre- and post retirement.
South Africans are notoriously poor savers. Only one in six South Africans will be able to retire comfortably. The problem is people want to spend money now and not save for the long term.
Are you saving enough?
How do you know if you are saving enough? First you need to decide at what age you wish to retire?
Next make a realistic, if not conservative, projection of the likely rate of return. You can then calculate how much you need to save. Regular checks should help ascertain whether you are on track to retire as your desired age. If you cannot afford to retire then don’t. As a general rule people should have around 20 times their normal annual salary saved on retirement.
Inflation is another risk to your retirement savings. Consumer inflation is currently approximately 5% so capital increases should be keeping pace with this in order for you to retain purchasing power. If inflation exceeds your investment return you are going to be delving into your retirement capital as opposed to your investment growth. This results in you having to reduce your standard of living.
How do you protect yourself against inflation? Use absolute return funds as part of your portfolio.
These funds use inflation as the benchmark, and therefore invest in order to beat inflation by a certain percentage (determined by the type of absolute return fund). When markets fall, these funds protect capital, and when there’s a bull run they’ll try to participate in the run. The net effect is that you’re ensured that your return will always beat inflation.
Those funds should form part of a diversified portfolio, invested across a number of funds, asset classes and fund managers in order to reduce volatility. Don’t switch between asset classes too often.
Don’t try to be too active or try to time the markets. There will be times when you lose money, especially if you’re invested over a long period.
But don’t panic as this is only natural.
Beware of your emotions
Emotional investing is a fundamental mistake made by savers. Investors make emotional investment decisions and thereby destroy most of the potential performance. Rather determine your investment term, define your strategy and then stick to that strategy for the complete investment term. That strategy should only be amended if, for example, circumstances were to change, or an under-performing manager is replaced.
If you are unprepared for retirement – or you have failed to fully understand the importance of providing for retirement — remember that no one else will care about your financial position. You are the only one responsible for your financial future.
For further financial information please contact DebtBusters on 0869 99 06 06 or visit our website wwww.debtbusters.co.za.