The majority of South Africans will not have enough money to sustain their current standard of living when they retire, research has shown.
Recent increases to VAT and the fuel levy, among other things, have worsened the outlook for some; yet compromising on your retirement savings should be the very last resort, said Steven Nathan, chief executive officer at 10X Investments.
He has outlined nine mistakes retirement savers frequently make, as well as some tips on avoiding them.
You can't save like a pauper and then expect to live like a prince in retirement.
1. Saving too little
The number-one reason most people miss their retirement goal is because they don't save enough. "You can't save like a pauper and then expect to live like a prince in retirement," said Nathan.
Most companies offering retirement investment products can help you calculate what would work best for you when you retire, based on your current salary.
2. Paying high fees
Fees matter a lot more than most people imagine, pointed out Nathan. In the context of a 6.5 percent real return (that is: after inflation), every one percent paid in fees reduces the return by more than 15 percent. If investors are paying 3 percent in fees, the return will be reduced by 45 percent, which means that almost half of the real annual return is lost to fees.
When the effect of compounding (where you earn a return on your return) is included, the negative impact can be devastating. Nathan has urged investors to understand the fees they are paying, and to look for a low-cost provider that charges no more than one percent in total annual fees.
3. The wrong asset mix
Choosing an asset mix that mirrors personal risk tolerance, such as conservative or risk averse, but is not appropriate for the investment time horizon can dramatically damage a retirement outcome.
Nathan said it's critical to grow your savings at a high rate for the majority of your savings period, which is why you should be invested in a high equity fund. A lower growth portfolio would be insufficient in the context of a 40-year savings plan, based on a 15 percent savings rate.
4. Investing in an underperforming (actively managed) fund
With actively managed funds you have a very small chance of choosing a winner, while an index fund ensures that the saver earns the average market return.
Nathan pointed out that when it comes to retirement investing, it is more important to eliminate the downside risk and reach the minimum savings goal than to entertain upside risk in the hope of overshooting the savings goal. No one should be gambling with something as important as their retirement savings.
Remember, it's about reaching your goal with the lowest possible risk; it is not about speculating your way to a dream existence.
5. Emotional switching
Chopping and changing funds or asset classes, especially during periods of market turbulence, often leads to buying high and selling low. Investors should rather stick to their plan and avoid the temptation to switch or try to time the market.
6. Inadequate diversification
If you are overinvested in one asset class or security, you assume concentration risk, the risk that one investment will have a disproportionate impact on your savings outcome. As a retirement investor, you cannot afford the downside risk as it may ruin your pension.
"Remember, it's about reaching your goal with the lowest possible risk; it is not about speculating your way to a dream existence," said Nathan.
Savers should invest in various asset classes — equities, bonds, property and cash, each providing exposure to many different underlying securities, held across different currencies, local and international, and regions (for example, developed and emerging countries).
7. Saving outside retirement funds
Tax-free deductions and investment returns can potentially increase the value of your retirement savings by up to 30 percent. And you score again, because your retirement income is almost always taxed at a lower average rate than the marginal tax you saved on your contributions. Other savings vehicles, such as bank accounts, stockbroker accounts and unit trusts, do not offer this tax advantage.
The sooner you start contributing to your retirement fund, the longer your money has to grow.
8. Starting to save too late
Few people in their 20s worry about retirement, but ideally we should start saving towards retirement from our first paycheque. We should keep it up throughout our working life — that's around 40 years on average.
Nathan said it is important to remember that contributions are only one source of your future retirement income; the other is the net investment return you earn on your contributions.
"The sooner you start contributing to your retirement fund, the longer your money has to grow."
Initially, he added, the returns add only a little to your total pot, but once compounding kicks in, the growth will pick up and continue building momentum.
"The effect is much like a snowball rolling down a mountain, until the compounded investment return totally overwhelms your contributions."
9. Cashing in savings on changing jobs
Not preserving what has already been saved is a very common mistake in South Africa, as up to 80 percent of fund members have at some point cashed out their savings when they changed jobs.
Not preserving is like starting late: people lose not just the accumulated savings, but the return on those savings for the remainder of the savings term. The foregone return becomes a big number when a fund is cashed in 30 years ahead of time.
"When it comes to retirement planning, various factors are beyond your control, such as the macroeconomic environment and stock market performance, which makes it even more important to understand and control the many factors that you can," Nathan concluded