Don’t make these common retirement savings mistakes

Even minor financial mistakes and losses can have significant impact on your quality of life in retirement. Zweli Moyo, Head of Institutional Business at Nedgroup Investments, explains some of the most common mistakes people make when it comes to their retirement savings, and how to avoid them.

Saving too little, too late

Saving for retirement is not high on the priority list for young people who are just starting a career, with many feeling that they cannot afford the contributions. However, Moyo stresses that it is never too early to start contributing to a retirement annuity or company pension fund. “It really is a case of the earlier the contributions start, the better, even if it is a smallish sum,” ­­­he says. Saving R1000 in your twenties is worth significantly more than saving the same amount in your fifties, due to many extra years of compounding benefits.

As a rule of thumb, 15% of your salary should be contributed towards retirement savings. “However, the later you start saving, the higher your contribution should be to offset for the missed years. So, if you start saving in your twenties, you might only need to contribute 8-10% of your monthly salary, while waiting another ten years will require your contributions be closer to 15-20% of your salary, in order to achieve the same savings at retirement.” Moyo advises that even if you cannot afford this kind of contribution, you should pay in as much as they can towards retirement saving.

Do your homework on where to invest your company pension fund contributions

A company pension fund is usually the primary retirement savings for most people and plays a huge role in determining your overall savings at retirement. Although an increasing number of company pension funds now offer a range of portfolios in which their members can invest, the majority of members fail to make a choice, resulting in their savings being invested in a default portfolio, These default portfolios are usually chosen to suit as many fund members as possible.

“However,” remarks Moyo, “this does not necessarily mean that it is the most suitable choice for you.”

Don’t leave it up to your employer to choose the best option for you. Doing your own research and studying the literature that the company pension fund provides will help you assess the extent of your own risk.

“Seek financial advice from an independent financial advisor who can assess your overall financial situation and provide objective feedback, before you commit you hard-earned contributions to a specific portfolio,” advises Moyo.

Forgetting about the impact of inflation during retirement

Inflation currently poses one of the greatest challenges to pensioners. Most people will opt for a fixed annuity at retirement, because they have the security of knowing how much income they will receive annually.

However, Moyo reminds investors that compensating for the effects of inflation is crucial if your retirement is to remain as comfortable in twenty or thirsty year’s time as you imagine it will be now. By choosing an annuity that increases each year in line with inflation, you can preserve your buying power in the future.

Not adjusting your contributions

Most people will adjust their living standards with an increase in salary. While it is natural to want to buy a bigger house or replace your TV with a HD surround sound home theatre, it is also crucial that your contributions to retirement savings are also revised.

“Review your financial situation regularly – and if you can afford to, increase your contributions so that you are always paying as much as you comfortably can,” suggests Moyo.

It is also a good idea to review your contributions when you pay off a loan or there is some financial change in your life. The money you would save each month, if contributed to retirement savings, could drastically improve your financial position in your golden years.