Having a plan when saving for retirement is half the battle won. Last month we examined how important it is to set goals when planning your long-term financial future. Since retirement saving often focusses on a goal that is decades in the future, it is inherently difficult. Breaking things up into short, medium and long-term goals helps immeasurably.
Following your financial plan requires consistency and discipline, and an awareness of the common hurdles you can stumble over on your way to building the nest egg you’re aiming for.
Warren Ingram, the executive director at Galileo Capital, believes that “our need for instant gratification” is “probably at the top of the list” of challenges people face when saving. On one hand, you could simply not be saving enough and instead spending what you should be putting away. On the other hand, it could be spending your retirement savings when changing jobs. Cashing out your pension fund to pay down debt (or simply spending it) can be one of the biggest hurdles to saving an effective sum for retirement.
The National Treasury is currently trying to address this issue by reforming elements of the retirement process, but it’s something that investors need to bear in mind when faced with the option of spending retirement savings.
One of the largest threats to saving in the long term is inflation (and it’s largely invisible!). Simply, inflation is the increasing cost of living that you need to keep up with, and ideally beat. The value of R1 000 today is less than it was one year ago, and will be worth even less as the years march on. With inflation averaging around 5% a year over the past five years, your investments need to return more than 5% to keep up.
This is where costs and fees come in. You need to factor them inbeforeyou calculate your returns versus inflation. Suddenly, a 6% annual return that looks great on paper but carries 2.5% in fees does not compare favourably with inflation at 5%. Ingram says people will generally know if they’ve invested in low, medium, or high-risk funds. But they won’t know what “a 2% difference in costs a year” actually translates to. This, he says, could be the difference between retiring securely or not.
Related to this, Ingram says a major obstacle is “incorrect asset allocation, where savers approaching retirement will typically be underweight in inflation-beating asset classes” (in other words, equities and listed property). The mistake investors sometimes make is to switch to so-called “safer” asset classes like cash without properly weighing the pros and cons with a financial adviser. Investors sometimes try to “buy certainty,” says Ingram “and the certainty is that they don’t beat inflation at all”.
We cannot help but pay attention to volatile exchange rates, especially during a period of sharp depreciation like the one we’ve seen in recent months. Asset diversification is an important tool for investors who want to protect themselves against depreciation, and there are numerous products available to South Africans that allow them to get exposure to other markets.
Finally, what many consider an obstacle – market crashes – doesn’t necessarily have to be thought of as negative.
Ingram points out that in the long term there is a major market crash every seven years on average. “If you are saving and living for 60 years, [which you will likely be if you start saving in your early twenties,] you’ll experience eight or nine crashes.”
“The tide comes in and it goes out,” he says. The important thing is not to adjust your behaviour based on your emotions.
This also means that investors should be cautious about being over-optimistic when markets are doing well.
Consistency and discipline, especially in the lead up to retirement is critical. And if you don’t stumble over one of these common hurdles, you will likely execute your plan almost perfectly.
For more information on investing, speak to your financial adviser.
This article is part of an investment series by Discovery Invest.
Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07. For more information on Discovery Invest, contact your financial adviser.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell investment funds.