Manage these biggest threats to your retirement savings
By Wouter Fourie(CFP®) CEO of Ascor Independent Wealth Managers and 2015/2016 FPI Financial Planner of the Year
Those who diligently save for retirement can be at risk if they don't manage the threats of low growth, high costs or a too-short savings horizon
Planning for retirement can be difficult in an environment where even the cost of a car service can be a nasty surprise. And those who diligently save for retirement can be at risk if they don't manage the threats of low growth, high costs or a too-short savings horizon. These risks were highlighted in recent findings of a benchmark survey published in last week's Money.
The survey found funds believe only 20% of South Africans are on track to retire with a reasonable level of their pre-retirement income and that retirees should invest at least 15% of their salary for between 30 and 40 years to be able to retire in some comfort. Let us touch on each of these risks.
There are many threats to the growth of your retirement savings. In our practice, we often welcome new clients who need help after buying a ready-made, off-the-shelf pension savings product that does not take into consideration their personal and professional life stage, goals and post-retirement needs.
As with many other generic products, investing into these will hardly ever provide the same growth as a plan that has been custom-made for you and is regularly revisited by you and your financial adviser.
These generic products are also influenced by the other two main risks highlighted in the benchmark study, namely high costs and a too-short savings horizon.
High costs and debt
High costs and debt take away from the amount you can save for retirement.
The study found that as much as one-fifth of the average 16% people invest in retirement and group life products (as part of their employer's pension fund scheme) is absorbed by consulting fees, group life benefits and other administrative costs.
You may have calculated that you can retire relatively well by saving 16% of your salary, but technically you are falling so far short every year, roughly calculated, as an average person you would have to save for another five years to reach the same level you thought you would have reached by saving the full 16%.
Debt, especially that which remains after you have retired, also risks eroding your life savings significantly.
If you have a large, expensive vehicle, home or other debt payments that remain after you retire, you may find your savings run out well before you reach the end of your life.
You may be required to draw a large portion of your pension fund at the start of your retirement to settle this debt, which means it can no longer grow as part of your savings and contribute to later pension payments.
A short savings horizon
Time is your greatest asset when it comes to saving for retirement.
As shown in the benchmark study, you will end up with 74% of your last salary per month if you had invested in your pension for 40 years, whereas you will have only 11% of your last salary per month if you start saving for your pension only 10 years before retiring.
To make up for lost time, you can invest a much higher portion of your income for retirement.
You can also extend your working life to allow your retirement savings to grow more and to allow compound interest (interest on previously earned interest) to take effect.
If you are concerned that you may not have enough time to save for retirement, consider the old Chinese saying that the best time to plant a tree was 20 years ago and the second-best time is today.
Don't go it alone
It is only human to look for the next big thing to make up for lost time.
For instance, you hear of a "secret investment" that has made many unnamed people rich and you also want a piece of the pie.
Or you manage your own investment portfolio and you are struck with an overwhelming urge to withdraw your funds during a downturn in the market.
Our inclination to make stupid mistakes, postpone our pension planning, follow the herd, throw caution to the wind, become impatient and overestimate our own investing prowess is so commonplace that it has spawned a new field of study — behavioural finance — that tries to understand why we are so bad when it comes to our own planning.
To counter these risks and help you set your retirement goals, seek the help of an independent certified financial planner.
CFP-accredited, independent advisers are held to the highest standards in the industry and can offer you more than the generic, one-size-fits-all products.
Read more on Ascor® Retirement planning