Individuals planning their retirement are often faced with the challenge of choosing the right combination of investment vehicles now to help them work toward a goal that may be decades away, leaving investors feeling overwhelmed and confused. According to Anthony Katakuzinos, Chief Operating Officer at STANLIB Retail the key is to concentrate on the basics and to make sure you are getting some fundamentals right.
Invest now, do not wait
The cost of delay can significantly impact your long-term investment goals. To put the power of compounding to work for you, start investing now. It is often easy to put off investing, thinking that you will have more money or more time at some point in the future. However, the longer you wait, the smaller your lump sum investment will be when you want to retire to a particular lifestyle. The example below is an indicator of the power of compound interest over a long term. Bill starts saving R1000.00 in his first year of employment and saves R10000.00 0ver the next 10 years and stops. Bob starts saving from his 10th year of work and saves R1000.00 every year for 20 years.
Years |
Bill |
Bob |
1 |
R 1 000.00 |
R - |
2 |
R 1 000.00 |
R - |
3 |
R 1 000.00 |
R - |
4 |
R 1 000.00 |
R - |
5 |
R 1 000.00 |
R - |
6 |
R 1 000.00 |
R - |
7 |
R 1 000.00 |
R - |
8 |
R 1 000.00 |
R - |
9 |
R 1 000.00 |
R - |
10 |
R 1 000.00 |
R - |
11 |
R - |
R 1 000.00 |
12 |
R - |
R 1 000.00 |
13 |
R - |
R 1 000.00 |
14 |
R - |
R 1 000.00 |
15 |
R - |
R 1 000.00 |
16 |
R - |
R 1 000.00 |
17 |
R - |
R 1 000.00 |
18 |
R - |
R 1 000.00 |
19 |
R - |
R 1 000.00 |
20 |
R - |
R 1 000.00 |
21 |
R - |
R 1 000.00 |
22 |
R - |
R 1 000.00 |
23 |
R - |
R 1 000.00 |
24 |
R - |
R 1 000.00 |
25 |
R - |
R 1 000.00 |
26 |
R - |
R 1 000.00 |
27 |
R - |
R 1 000.00 |
28 |
R - |
R 1 000.00 |
29 |
R - |
R 1 000.00 |
30 |
R - |
R 1 000.00 |
Total Saved |
R 10 000.00 |
R 20 000.00 |
At the end of 30 years, Bill’s initial investment will be bigger than Bob’s.
Answer |
Bill |
Bob |
Total Invested |
R 10 000.00 |
R 20 000.00 |
Value at end of 30 years |
R 117 940.43 |
R 63 002.50 |
Katakuzinos says that the average person only has 500 pay cheques to contribute to their retirement in their lifetime. The earlier a person starts, the better off they will be as there are limited opportunities to contribute to their retirement.
Understand your risk appetite
All investments are subject to different types of risk, which can affect the investment’s return. Cash is primarily affected by purchasing-power risk, or the risk that its purchasing power will decrease due to inflation. Bonds are subject to interest-rate risk, or the risk that interest rates will rise and cause the bond’s value to decrease, and default risk, or the risk that the issuer will not repay the bond. Stocks are primarily subject to nonmarket risk, or the risk that events specific to a company or its industry will adversely affect a stock’s price, and market risk, or the risk that a stock will be affected by overall stock market movements. These risks make some investments more suitable for longer investment periods and others more suitable for shorter investment periods. For longer term investing, one would invest in a balanced fund where the fund manager would choose the best mixture of assets over time. The key aspect of understanding your risk is to understand how you will react when equity markets go through correction cycles and try and manage your expectations so you stick to the long term plan and not panic in the short term.
Maintain reasonable return expectations
Assessing your progress every year will allow you to make adjustments along the way. When developing your financial goals, you will typically decide how much you need, when you will need the money, and how much you will earn on those savings. Those factors will determine how much you will need to save on an annual basis to reach your goals. While past returns are not a guarantee of future returns, you will want to start by reviewing historical rates of return for investments you are interested in. Generally a high equity portfolio like a balanced fund will give you inflation plus 5% over a 15 to 20 year period.
Ensure you have a diverse investment basket
Typically, you do not know which asset class will perform best on a year-to-year basis. Diversification is a defensive strategy - it helps protect your portfolio during market downturns and helps reduce your portfolio's volatility. Diversify your investment portfolio among and within a variety of investment categories.
Have a long-term timeframe mindset
Timing the market is a difficult strategy to accomplish successfully, since so many factors affect the market. Remember that most people, including professionals, have difficulty timing the market with any degree of accuracy. Instead, concentrate on setting an investment programme that works in all market environments and that you can stick with in good and bad times. During the course of one’s life, you need to preserve your pension so as not to erode your savings. Preservation funds can protect and grow your investment over a period of time.
Pay attention to taxes
Taxes are probably a portfolio's largest expense. Using strategies that defer income for as long as possible can make a substantial difference in the ultimate size of your portfolio. Government has given some great tax benefits to encourage people to save for retirement. Use them! The compounding impact of tax free returns on income and capital gains over 20 years is great and can make a difference to a more comfortable retirement.
“As retirement season draws near, investors start to think about how they can make the most of their investments and take advantage of tax benefits,” says Katakuzinos. “However, at STANLIB, we believe that 28 is not a magic number. Investors should have a continual focus on their retirement savings and the 28th of February should not be the only time that these investments are scrutinised.”
Katakuzinos concludes “a good balance fund will help make the process much simpler by firstly, starting young and the impact on the ability to save will be smaller. Secondly, balance gives you a good, professionally managed, diversified portfolio where the manager chooses the opportune time to go into the different asset classes. Thirdly over a 15 -20 year period, it should aim to give you a return of inflation plus 5%. Fourthly, use the tax benefits provided by government to enhance the ability to build a reasonable retirement amount as the compound impact on gross returns is huge. Lastly, remember that you need to save 10 to 12 times your annual salary to retire comfortably. Will your pension fund alone get you there?”